What is a 203k Loan????
The FHA 203k renovation loan program provides funds for both the purchase and renovation of a home packaged into one mortgage loan. Additional guidelines are set forth specific to 203k loans to provide for renovation of the home. The purchase of a house that needs repair is often a catch-22 situation, because the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased. HUD’s 203(k) program can help you overcome this obstacle by allowing you to borrow funds for the purchase or refinance of a property plus the cost of making the repairs and improvements in one mortgage.
Here is a quick guide on how a 203K loan works:
- Find a 203K specialist for loan pre-approval
This ensures you know the price range of homes to be shopping for and that you are comfortable with the total monthly payment, down payment and costs to close. The specialist will help you understand the process and requirements of the FHA 203K loan.
- Search for your home, the most exciting part of the process!
Shop for properties with a real estate agent that understands your needs, financial limitations and your home preferences to find your dream home.
- Writing the “as-is” contract on your chosen property
When writing an offer with FHA 203k financing, the contract price is whatever the buyer wants to offer on the “as is” condition of the home. Its “as is” because that is one of the great benefits of the FHA 203k loan – the seller does not have to do anything. The only difference in language when using FHA 203k financing is the verbiage “Subject to FHA 203k feasibility study.”
- The FHA 203k Feasibility Study….what is that?
This study occurs when a HUD approved 203k consultant (3rd party estimator) inspects the property to ensure it meets Minimum Property Standards (MPS) as mandated by the Department of Housing and Urban Development (HUD) it may also include changes the client may wish to make during the 203k renovation process. You are then provided with the Feasibility Study which include the list and costs of repairs/renovation for the property.
- Formal Loan Application
Once you have received the Feasibility Study back you will meet with your lender for the formal loan application. Documents are reviewed to ensure that the home purchase remains affordable and the future repairs/renovations are within budget. The Feasibility Study may be fine tuned to fall within the parameters of your affordability. The formal loan application will then occur. It will then be sent to be processed, underwritten and approved.
- Find a State Licensed Contractor
While your loan is being processed find a contractor licensed in the state you live in this is a requirement of the FHA 203k program. Have the contractor(s) create an estimate for the alterations to be done to the property: the Feasibility Study will also provide cost parameters to the future improvements . Once your contractor is chosen and the final estimate of repair is finalized with the 203k consultant the “specifications of repair report” will be generated and used for the appraisal report.
- The Appraisal Process
A qualified FHA appraiser will then appraise the property under contract “subject to” the completion of repairs/renovations as if they have been complete. Once the report is complete your file will be turned into underwriting for final approval. Your loan documents then get submitted to the title company. We have a Baltimore City appraiser, Baltimore County appraiser, Howard County appraiser, Harford County appraiser and a Cecil County appraiser on staff to answer any of your appraisal questions.
- Closing
Once closing is complete you will have full possession of the home and your contractor can begin the work. The contractor will be paid incrementally with an account the lender has set up with the financed funds to ensure the contractor performs the work agreed upon.
There are advantages and disadvantages to a 203k loan. An advantage is that the 203k rehab loan allows you to hang on to your savings when fixing up a house in need of repair. Repairs on a house can be very expensive. A disadvantage is that the closing process for this type of loan takes a little longer than the average loan. In most cases, you can expect to wait up to 45-60 days for the loan. To become more informed about the 203k process contact Heidi Gage from Movement Mortgage at heidi.gage@movement.com.
Fannie Mae also has a version of a renovation loan called the Homestyle Renovation Loan. The concept is similar to a 203k in which it also allows buyers to borrow money based on what the house is expected to be worth after the home rehab is complete.
The 203k and the Homestyle Renovation Loan both have one mortgage, one closing and one interest rate. Some of the differences between the two loans is that there is no renovation specialist involved in the Homestyle Renovation Loan, varying interest rates, loan limitations and the amount of down payment. Having multiple options opens the door for buyers to make an informed decision on the best route to take when purchasing and renovating their next property.
A video has been included by Ms.Gage to further explain the steps of a 203k loan. She is also well versed in the Homestyle Renovation Loan.