Want To Renovate Your Home?

By Author: Scott Heggs
Total Articles: 12
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Bonnie Wilt-Hild , FHA Underwriter & HUD Trainer

Want To Renovate Your Home? Try A FHA 203k

In today's real estate environment, mortgage money for home improvements can be hard to come by. Most lenders are sticking to traditional loan programs for purchase or refinance programs having very little appetite for 2nd mortgages, HELOC's or home improvement loans. Cash out refinance transactions are an option should a borrower wish to borrower funds to complete a home renovation but with declining markets nationwide just beginning to stabilize and reduced loan to value requirements for cash out refinance transactions, the likely hood of most individuals having sufficient equity to pay off their existing mortgage, borrower sufficient funds for the home improvement and perhaps roll in closing costs while not exceeding 80% of the current value of the home is pretty slim. It becomes even more complicated when completing purchase transactions simple because traditional conventional and government loan programs do not support cash out to a borrower at time of closing ...
... which is greatly needed in a market dominated with bank foreclosure sales.

Properties sold by banks after foreclosures present a unique challenge for most potential homebuyers. While they are generally sold under fair market value which can be quite a bargain, they generally also need repairs which of course cost money which is something that a lot of potential homebuyers don't have an excess of after paying the down payment on the home and of course settlement costs. So the question becomes how does a homeowner or potential homebuyer find the funds necessary to complete a renovation on their existing home or perhaps one they wish to purchase? The answer is the Federal Housing Administration's (FHA) 203k rehabilitation loan program.

This program is FHA's primary program for neighborhood revitalization and rehabilitation and allows existing homeowners as well as homebuyers to not only borrower the funds needed to purchase a home or payoff their existing principal balance but also roll in the funds required to make the needed improvements to the property. Completing the transaction isn't very complicated either and except for a few additional steps which are required to document the intended repairs, it is a simple as applying for any mortgage. The 203k can completed one of two ways, that being as a streamline 203k or a standard k, with the standard k be the more complicated of two. The streamline 203k is for rehabilitation pieces up to $35,000 which are cosmetic in nature and by this I mean new kitchens, flooring, remodeling a bath or perhaps replacing a roof. There can be no structural alterations to a property if completing the rehabilitation under the streamline 203k, in other words, no room additions.

Documenting the rehabilitation for either a purchase or refinance transaction simply requires an estimate from a licensed contractor indicating all repairs to be completed as well as the cost, a copy of their licensee and a copy of their liability insurance. Once this information has been received the lender can move to the appraisal step and the appraiser will appraise the property for what it will be worth once the repairs have been completed. This is very important particularly if in its current condition the property value will not support the lender's loan amount including the rehabilitation. By allowing lenders to use the after improved value, a lender can base their loan to value on a higher appraised value allowing the borrower to borrower the funds necessary to make the needed repairs or renovations.

The standard 203k is for rehabilitation pieces greater than $35,000 or that contain structural alterations to a property and can be a minimal as adding a family room to as complex as adding an entire 2nd floor. This program requires the use of a FHA 203k consultant who will complete the work write up for the borrower as well as other required exhibits such as architectural exhibits such as plans or perhaps engineer certifications should the borrower be completing renovations that will result in structural alterations to the property. It is important to have an idea of what the current market values of the homes in your area are because in some instances the repairs that an individual would like to make to their property could result in the property becoming an "over improvement" for the area. This means that even though your home may be the nicest home on the street, it still may not be worth the money invested to make major improvements, in other words don't try to build a mansion in a neighborhood where the average value is $250,000.

The cost of the 203k is about the same of any standard mortgage transaction with interest rates comparable to any FHA or conventional program. Closing costs are a little higher with borrowers paying a supplemental origination fee due to the amount of work involved for the mortgage lender to complete the transaction. Aside from the documentation needed for the rehabilitation piece, lenders still require paystubs, W-2's, bank statements and will pull a credit report to determine that a borrower qualifies from a credit and capacity standpoint and as with any FHA insured mortgage, Up Front Mortgage Insurance as well as monthly mortgage insurance will be charged by HUD.

The 203k is a great program for any individual who wants to buy a handy man special and fix it up or a current homeowner who would like to complete some updates to their existing home, however it is important to plan the rehabilitation piece of the mortgage before you incur personal expenses such as employing an architect to complete plans for your addition. The first step is to determine if the fair market values of properties in your immediate market area are sufficient to support the renovations being made to your home because analyzing the as is value of the property is something that the lender will do in addition to making sure the after improved value of the property supports the loan amount being requested. Next, make sure the contractor you employ gives you a fair estimate for the work you would like to complete, I would suggest obtaining more than one. Finally, make sure the contractor is reputable. Remember once the 203k repair escrow is paid out and released, there is nothing HUD can do to help you if you are unsatisfied with the work completed. If you would like more information on this product contact one of our mortgage professionals at MortgageSeeker , you can find a local lender via their web site at:

www.mortgageseeker.net .
Scott is a Financial Professional with over 18 years in the Mortgage industry and the Debt Relief industry. He has written many article on the subjects of Debt Relief and Mortgage Financing.