St. Louis Mortgage Help

Financing a Fixer Upper, Foreclosure or Outdated House with the FHA 203k

February 25th, 2014 1:49 PM by Bob Rutledge

With housing prices on the rise again and the inventory of available homes at near record lows, buying a home has become quite challenging for any home buyers but especially first time home buyers  with a small budget. If you’re still looking for a sizable home, but don’t want to shell out the big bucks, investing in a fixer-upper house could be a great option for you. With a little bit of work, you could turn a less than perfect house into your dream home, especially if work with an experienced loan officer plus a contractor to do the repairs. However, paying for the house and the repairs might be difficult because many lenders don’t want to finance a house that requires a lot of work. 

The FHA 203k Renovation Home Loan is the perfect mortgage for those who want to have all the houses listed for sale available to them, won’t settle, dreams of what their home will look like, and is willing to think outside the box. The 203(k) loan includes funds for the purchase, repair/improvement costs, inspection fees, and even six month’s carrying costs.

The program is primarily designed to finance the renovation of homes which serve as the principal residence. Eligible properties are one to four dwelling units that have been constructed for at least one year. The units have to comply with local zoning regulations. Loans might apply to houses moved from one site to another for renovation. Furthermore, also current homeowners can also use the 203(k) loan to refinance existing mortgages. The program has a six-month deadline for completion, though there are extensions available if warranted. 

There are two different 203(k) loan options for homebuyers, depending on the scale of the home renovation project. The standard 203(k) program starts with a feasibility study, overseen by an approved consultant, which helps the FHA determine whether the home repairs are justified. Together with the lender, the consultant monitors the project’s progress and conducts a final inspection after completion. The streamlined version is for smaller, less complex projects where no permits, plans or specs are needed. In addition, the homeowners don’t need a consultant and can just use a certified contractor.

Below are the basic steps that you need to do if you want to finance your fixer-upper though the 203(k) loan program.

  1. Figure out what you can afford.
    First, you need to determine how much you can spend on a new home. Current 203(k) loan programs are 3.5% down and the minimum loan amount is $5,000. Contact Bob Rutledge with USA Mortgage to see for what loan amount you would qualify based on your income and taxes. Yet, keep an eye on what you can actually afford and don’t stretch your budget too much. You should also check if the cost of the house plus renovation exceeds check the HUD’s maximum mortgage limit in that area.
  2. Find a house with potential.
    It is smart to find a fixer-upper in a desirable location as this would significantly increase the house’s market value after its renovation is completed. I tell my home buyers to find that near perfect house, that house that meets all your needs except the condition of the house, because the FHA 203k will fix the condition of the house that will be your next new home.
  3. Execute a sales contract.
    To do this you must have an experience Real Estate Agent working for you, one that is not afraid of the FHA 203k. Some agents are afraid of the FHA 203k because of loan officers who ‘try to close a FHA 203k but fail. You need to have a sales contract for the home you wish to renovate in order to proceed with the 203(k) loan application process. The contract has to include a clause stating that the sale of the house is contingent on your ability to receive financing through the 203(k) program. You can also ask the seller to pay the closing costs as this would lower the amount of money you would need to complete the purchase.
  4. Apply for the 203(k) loan.
    Find a Lender/Loan Officer highly experienced with the FHA 203k, it will save you money, time and headaches. These loans are approved every work day of the year, the qualification for all borrowers is no different than a normal FHA loan, there is a little extra work because of the renovation work addition to the application but it isn’t something to be concerned about. A normal FHA 203k can be closed in 45 days, after sales contract acceptance and mortgage application, give or take 10 days.
  5. Find a contractor.
    Sometimes I will advise that you find a contractor as soon as possible especially if you know for sure you will utilize the FHA 203k, this step could come in before you find a house. The 203(k) program requires that the renovation be performed by a qualified contractor as approved by the lender. Your Loan Officer if experienced with the FHA 203k will have a list of qualified contractors to refer to you to choose from. Having the right contractor in place as soon as possible is the key to the smoothest loan application from start to finish.
  6. Get an estimate by a consultant/contractor.
    Since the amount of the 203(k) loan cannot be changed once the application is approved, it is crucial to get an exact as possible estimate of the renovation expenses prior to construction. 203(k) loans require at least a 10-20% contingency reserve for unexpected expenses. The best way to estimate the costs is by hiring a contractor familiar with the FHA 203k, then your Loan Officer/Lender and a HUD Consultant we hold a Summit Meeting at the house with you to determined what must be done to the house to bring your home up to HUD minimum standards along with your wish list.
  7. Get an appraisal. The appraisals will have two values, one for the current value of the house (“as-is”) and another one for the estimated value of the house after the repairs (“as-completed”). The loan amount should not surpass either the “as-is” value of the home plus the cost of repairs or 110% of the estimated “as-completed” value.
  8. Close on the home.
    When your 203(k) application is approved, you can purchase your fixer-upper home. If you can’t move in right away, you can roll in six months of mortgage payments that can be included in your loan to pay the mortgage and live somewhere else for the time being. But, this must be determined before the final loan approval, be approved by the HUD Consultant and is best to be worked into the initial loan application.
  9. Adhere to the schedule.
    You have to make sure that the renovation work is being completed within the six-months deadline. The repair fund is held in escrow and is disbursed in installments to the contractor (or to you, if you’re doing the work yourself). A HUD-approved inspector will review the progress of the renovation before each disbursement is made.
  10. Get a final inspection.
    Once the work is completed according to the initial agreement, you will have to get a final inspection. If any money is left over (e.g. if you did the work yourself), it will be applied toward the principal of the loan.
Posted in:General
Posted by Bob Rutledge on February 25th, 2014 1:49 PM


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