Buying or refinancing a home with an FHA 203(k) mortgage offers a few advantages if your property isn't already perfect. That's because you can add renovation costs into your purchase or refinance loan.
Choose the FHA 203(k) mortgage for larger projects -- buying a fixer-upper or refinancing your home while also funding major renovations.
Another option is FHA's "Title 1" loan, which allows you to finance your smaller project. It isn't tied to a refinance or home purchase. For either of these loans, you need to work with an FHA-approved mortgage lender.Click to see your FHA loan eligibility (Aug 19th, 2017)
Financing home improvements with FHA can be better thanÂ getting a home equity loan for your improvements. That's because home equity loans require home equity, and this product does not. It allows you to add the construction costs to your loan, and uses the "improved" value of the property to calculate your loan-to-value ratio.
You can use the 203(k) mortgage to finance your home purchase and add improvements at the same time. Or you can get a 203(k) refinance and include your improvements in that loan.
The improvement refinance is kind of like a cash-out refinance, but you don't need equity, and you don't incur the risk-based surcharges that you pay with cash-out refinancing.
You can choose the standard 203(k), which works for renovations costing more than $35,000, or the Limited program for smaller projects. The standard program requires that you work with an approved 203(k) consultant to work out the costs of the upgrades.
FHA eligibility is not especially rigorous.Â But if you are eligible you'll still need to meet FHA's underwriting standards to get loan approval.
To apply, you must:
Your proposed improvements must also meet eligibility guidelines. Luxury items won't qualify, so your bathroom fireplace and outdoor hot tub may not cut it. But here are some projects that can be financed with a 203(k) loan:
These projects are especially useful for bringing an old home up to code.
Here are the steps you'll complete when buying a fixer-upper with an FHA 203(k) loan. It's a little different from a "regular" loan, because you'll be submitting your list of improvements, and the loan doesn't completely fund until the improvements are complete.
When the loan closes and funds, the seller gets paid. The rest of the money from your lender goes into your escrow account. The lender (or its agent) releases escrowed fundsÂ to the contractor as work is completed.
Once your contractor completes the work, you own a renovated house that may already be worth more than you paid for it. That's a sound investment as well as a home customized to your needs.
TheÂ minimum cost for improvements is $5,000. Your maximum refinance loan amount (subject to FHA loan limits) is the lowest of these three calculations:
If you have owned the property for less than one year, the lender must use acquisition cost plus the documented rehabilitation costs for your maximum loan amount.
The lender orders two appraisals. Â One determines the "as-is" or current property value, and the other provides the "improved value." Imagine thatÂ you owe $300,000 on a property worth $310,000. You need $50,000 for improvements, your closing costs are $5,000, and the improved value of the property would be $350,000. Your loan amount would be the lowest of:
So in this case, your maximum loan amount is $355,000. Your FHA mortgage will pay off your old loan and include extra to cover your closing costs and $50,000 in renovations.
FHA's Limited 203(k) program lets youÂ wrap up to $35,000 in renovation expenses into your mortgage to repair, improve, or upgrade your house. You don't have to work with a consultant.
You will, instead, work with your contractor to file a "work plan" with your application.
If you like your current mortgage (maybe your current loan has no mortgage insurance, or you've got an untouchable low rate), orÂ you don't need a huge loan for your home improvement, an FHA Title 1 loan may be your best bet.
You can borrow up toÂ $25,000 for as long as 20 years on approved improvements. Some of the advantages of Title 1 Loans are:
Keep in mind that FHA 203(k) loans are funded by lenders, not by HUD. Private lenders set interest rates and loan fees. So, compare quotes from several competing mortgage lenders to find the best mortgage rates, just as you would for any other home loan.
Mortgage rates today are amazingly low. They had been trending up, and then they fell back down. To get your best rate, contact several lenders and compare. Choose the one with the best deal for you.Click to see your FHA loan eligibility (Aug 19th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)