Applying for an FHA 203(k) loan will be a good idea if you want a home financing solution that allows you to pay down the loan as you pay for home renovations over time. You may also get the opportunity to shop for homes even in high-cost areas. Considering taking this loan in Wakulla County, Florida, here's everything you need to know for a productive loan process.
What is an FHA 203(k) Loan?
An FHA 203(K) Standard loan comes in handy when you want to make structural improvements that cost more than $35,000. The loan requires not less than $5,000 in repair costs with no cap on the renovation budget you're undertaking.
FHA 203(K) loans also take the form of a 203(k) rehab loan, making it easier to combine the home purchasing costs and renovation costs you incurred into one mortgage. It's a great solution if you want to purchase a fixer-upper that needs lots of repairs and rehabilitation, but you don't want to take more than one loan.
FHA 203(k) Lenders
Due to the detailed structure of FHA 203(k) loans, not every mortgage broker or loan officer understands the loan process. Also, not all mortgage lenders have the authorization to originate this type of loan.
Choose a lender approved to offer 203(k) loans and has a history of originating lots. You can check the HUD (US Department of Housing and Urban Development) website for information on approved lenders.
203(k) Loan Rates and Mortgage Insurance
Expect an FHA 203k loan to have a higher interest rate than the standard FHA loan. Though the rates are usually 0.75 percent to 1 percent higher than the standard FHA loan, FHA loans boast some of the lowest rates in the mortgage market.
The mortgage insurance requirement with the loan dictates you to pay 1.75 percent of the total loan upfront and 0.85 percent in 12 equal monthly payments. You can also roll the upfront mortgage insurance payment into the loan.
How FHA 203(k) Loans Compare to Conventional Loans
If you are new in the mortgage market, your first choice for a home loan can be a conventional loan rather than a government-insured loan like the FHA 203k loan. When purchasing a home and renovating, a conventional home loan will require you to have a high credit score and make a sizeable down payment. However, it allows you to do more luxurious or expensive updates or constructions on the home than the FHA 203k loan would otherwise allow.
If you want to purchase and renovate a fixer-upper, you may take a conventional loan and look for sources of financing for the renovations. But if your goal is to get a loan that combines the home purchase costs and renovation costs into one, FHA 203k loans will be ideal.
What Can You Use an FHA 203(k) Loan For?
Before applying for one, one must understand the use cases for FHA 203(k) loans. Since there are two types of FHA 203(k) loans, the extent of the repair work will depend on the type you choose. Here's a breakdown of what the Limited 203(k) and Standard 203(k) loans allow you to do.
Limited 203(k) Mortgage
The Limited 203(k) loan, formerly the Streamline 203(k), permits cosmetic repair work on home parts such as bathrooms and kitchens. It comes with a limit of $35,000 while requiring a buffer that amounts to 15 percent of the total bids.
The buffer, in this case, is a form of contingency fund that covers any cost overruns by your HUD-certified contractor. The money will be credited back to your account if it is unused.
Along these lines, the repair costs should be around $31,000 when the buffer is deducted from the loan limits. And you can use a limited FHA 203k loan to make the following non-luxury improvements:
Kitchen and bathroom remodels
HVAC replacements or upgrades
Roofing replacements (including downspouts and gutters)
Flooring and carpet
Energy-efficient home improvements
Septic system improvements
- Repairing safety and health issues
Standard 203(k) Rehab Loan
Unlike a Limited 203k loan, the Standard FHA 203k loan has zero restrictions on what you can do to your home. The only restrictions center around adding luxury amenities or making non-permanent changes. Under this loan program, the qualifying projects include:
Moving the property to a different site
Connecting to water or public sewer
Converting a single-family property into a multiple-unit (2,3 or 4 units) property
Doing some large landscaping projects
- Making the property more accessible to people with disabilities
What You Can't do with an FHA 203k Loan
It's no secret that the guidelines on FHA 203k loans are pretty lenient. However, there are certain things that the guidelines discourage when looking to use the loan to renovate your home.
In particular, minor landscaping projects that take more than six months and adding luxury amenities such as a swimming pool, barbecue area, and a tennis court aren't allowed.
The FHA 203(k) Process in Wakulla County, Florida
Like the standard process of buying a home, the FHA 203(k) loan process involves specific crucial steps. It starts when you apply for the loan from a 203(k)-approved lender and proceeds to the approval, choosing a contractor, getting bids for repairs, closing the loan, completing repairs, and moving in stages as discussed below.
Choose the Projects
During this stage, you must decide which home modernizations or improvements you'd like to make. But first, your lender will need you to address health or safety hazards such as mold infestation, derelict roofing, broken windows, missing handrails, and lead-based paint.
Once you address these issues, you can choose the cosmetic improvements to be done on the property.
Find HUD-Approved Contractors
With a project list assembled, it's time to choose licensed and insured contractors. The contractors must be available on a full-time basis and be experienced in 203(k) renovations.
Get Repair Bids
Only get official bids once a reliable contractor agrees to work with you. The bids must be accurate since the lender will share them with an appraiser.
An appraiser's role here is to work out the value of the renovation work and include it in the home's future value. This estimation will help the lender determine your loan amount.
Submit Your Personal Information to the 203(k) Lender
Your 203(k) lender should have your income, credit report, and asset information before approving you for an FHA 203k loan. They should also have all the relevant bid paperwork for the same effect.
Close the FHA 203(k) Loan
During closing, expect to sign the final loan documents. This is also when the lender will disburse the funds to your account, and the home will officially be yours.
HUD-Approved Contractor Starts the Work
After finalizing the home loan, the HUD-approved contractor can begin the home improvements. The extent of the repairs will determine the time it takes before you can move into the house. Make arrangements for temporary accommodation if you're carrying out a more significant project.
This has to be the fun part of taking an FHA 203(k) loan and using it to carry out improvements on a house. And by the time you move in, you'll probably have built some home equity.
You also have the chance to refinance out of the FHA 203(k) home loan together with the mortgage insurance requirement.
FHA 203(k) Loan Requirements in Wakulla County, Florida
As a home buyer or homeowner looking to take advantage of the FHA 203(k) loan program, you must meet various requirements to qualify. Most of the requirements are similar to the standard FHA loan requirements.
You'll have to apply with an FHA-approved lender and ensure that you're taking the 203(k) loan to finance the purchase and improvements of a primary residence. The repairs and renovations must also be done by a HUD-approved contractor instead of yourself.
Credit Score Requirements
The FHA loan program allows a minimum credit score of 580. However, this isn't the case with the 203(k) loan program since a score ranging from 620 to 640 is required.
The 203(k) credit score requirements are less lenient than conventional construction loans, which demand a score of 720 or more.
FHA 203(k) loans come with a 3.5 percent down payment requirement based on the home's purchase price and total improvement costs. If you purchase a home for $200,000 and the total project cost is $25,000, the required down payment amount will be $7,875 (3.5 percent of $225,000).
The 203(k) program also allows you to use gifts from family or friends or gift assistance from an approved nonprofit to make the down payment.
Income and Debt Requirements
203(k) lenders will review your debt-to-income ratio, which compares your total monthly income with the existing debt payments. The general rule here is that less than 43 percent of your monthly earnings must go towards debt payments, including mortgage payments.
With an FHA 203k loan, you can take up to 110 percent of the home's proposed future value. However, the borrowed amount should be within the FHA loan limits in your region.
The FHA is usually strict on the occupancy requirement. This ensures that FHA loans are only meant for financing the purchase of primary residences instead of vacation homes or investment properties. In this case, a 203(k) loan will only be ideal if you intend to occupy your purchasing property.
Only lawful permanent residents and US citizens can apply for FHA loans such as the 203(k) loans. Your 203(k) lender will verify your citizenship status when applying for the loan.
Using the 203(k) Loan - The Steps Required
You need to complete specific steps when you plan to use an FHA 203k loan to buy a fixer-upper. The process differs from a traditional FHA loan since it involves home improvements. Here's a brief breakdown of what to expect.
Find a 203(k) lender and gather several loan estimates to ensure you get a better deal.
Apply for the FHA 203(k) loan and get a valid pre-approval letter from a lender.
Find a suitable property and ensure that the offers allow you to use a 203(k) loan to finance the purchase while noting that the maximum loan amount is different for the purchases.
Enlist the services of an FHA 203(k) consultant if the improvement costs are way beyond the $31,000 limit. This specialist will help you obtain a proposal from HUD-approved contractors that will indicate the scope of work and the detailed cost estimate.
Get an estimate of the work to be done and materials needed from a contractor since the HUD doesn't require you to carry out the project by yourself unless you are a certified, full-time builder.
Get a green light from the lender, who will arrange for an appraisal with or without the required improvements.
- Close the loan once the home is appraised to allow the contractors to work on renovating.
The seller will get paid after closing, and the remaining loan amount will be deposited into your escrow account by the 203(k) lender. Your lender or agent will release the escrowed finances to the HUD-approved contractor only if the work is satisfactory.
Is it Possible to Refinance into a 203k Loan?
While the common use case for an FHA 203k loan is to purchase a property, you can also use it for refinancing. The refinancing option will only work for you if you have a minimum of $5,000 improvements.
Expect the 203(k) lender to order an appraisal that will reveal two values, including the improved value and the "as-is" value for the property after renovations. Also, the maximum loan amount for the refinance should be the lowest of specific calculations, which include:
110 percent of the property's after-improved value multiplied by 97.75 percent.
The as-is value, together with rehabilitation costs.
- The existing debt before rehabilitation, the estimated improvement, and permitted closing costs.
Your 203(k) lender would factor in the property's acquisition cost plus the documented rehab costs for the maximum loan amount if you owned the home for less than a year. Also, you won't need to have an existing FHA-backed loan to use the 203(k) refinance solution.
What Value is Created After the Renovations are Complete?
You'll want to be ascertained that purchasing a home is a good investment. The good thing with an FHA 203k loan is that you won't have to pay a premium for any improvements made by the property's previous owners. Instead, you will invest in improvements that match your lifestyle needs and personal tastes.
Even more, a recently remodeled home will be priced on the high end for the seller to recoup the remodeling costs. This won't be the case when using a 203(k) loan to purchase property since the home will be priced right, and you get to pay for precisely what you want instead of settling for what someone else wanted.
The Bottom Line
An FHA 203(k) loan presents an excellent and affordable opportunity to finance a home purchase and remodeling. But before you move forward with the application and compare lenders, learn about the 203(k) terms and rules.
Did you know that with a renovation loan, you can get the home of your dreams and enjoy much more? The loan allows you to add square footage to the property to grow with your family and add a new bathroom, pool, or cosmetic touches to create a more modern feel. Contact us today to start our loan process in Wakulla County, Florida.