A Beginner’s Guide to 203(k) Loans
We’ve been talking a lot lately about home renovations; specifically, we’ve been talking about how to finance your home repairs and improvements.
If you’ve been following our blog, you likely understand the basics of HomeStyle Renovation Mortgages from Fannie Mae, the different ways to structure construction loans, and how to use renovation loans properly.
But there is still a lot to discuss when it comes to loans for renovation and home repairs, and one of the most important topics is 203(k) loans from the Federal Housing Administration.
Financing Your Home Renovation with a 203(k) Loan
What is a 203(k) Loan?
203(k) loans are loans backed by the government through the Federal Housing Administration (FHA), which is an office of the Department of Housing and Urban Development (HUD). These loans are offered to home buyers looking to purchase a house that is either old or damaged and needs significant repairs to make it livable. For example, if you are looking to purchase a home that needs a new kitchen, the 203(k) program could loan you money for the purchase of the home as well as the cost of remodeling the kitchen.
The loans will generally include as much as 20% in contingency reserve, which is held aside incase the project costs more than predicted. The loan also can include the equivalent of up to six months of housing payments so you can live somewhere else while the renovations are being completed.
Benefits of 203(k)
The obvious benefit is that you have the financial cushion to not only buy a home, but also to complete expensive-yet-necessary repairs, which you might not be able to afford otherwise. The down payment requirements are generally minimal, and you can likely get a good interest rate on your purchase. Interest rates will certainly vary, but you can generally count on affordable terms.
What are the Downsides?
Unfortunately, not all properties will qualify, and there are limits on the amount of money you can borrow. Also, applying for the loan can be more time-consuming and complex, and you may even need to hire an independent consultant to prepare for the application, which will need to include a detailed proposal of the required renovations.
Only certain properties are eligible for 203(k) loans, but you will generally find that most moderately-priced single family homes will qualify for the program. To be eligible, it must be between one and four units and at least one year old; if the property was completed six months ago, it is not eligible. If a home has been torn down but some of the structure remains, it will be eligible for 203(k) financing. Also, if you are looking to move a home to a new location, you can use 203(k) loans to finance the project.
While co-ops are not eligible for financing through the program, some condos will be able to receive financing.
There are many projects that qualify for financing under the 203(k) program. From structural changes and repairs to improvements that enhance the value of the property, you will find that almost all projects will qualify.
Eligible projects under 203(k) include:
- Structural repairs
- Improvements to the functionality of the home
- Modernization changes
- Removal of safety hazards
- Aesthetic improvements
- Well digging and installation
- Updates to plumbing
- New roof and gutters
- Floor replacement and floor treatments
- Disability-access renovations (ramps, rails, etc.)
Eligible projects are not limited to the above list. Contact a mortgage expert to see if your specific project will qualify. (Hint: there’s a great chance it will!)
However, the program will not cover projects that are considered luxury improvements, such as the construction of pools or tennis courts, and it won’t cover changes that are not a permanent part of the property, such as buying shades, decorations, or furniture. For example, the loan will likely cover installation of new light fixtures, but not new lamps.
How Much Money Can You Borrow with 203(k)?
It’s the million-dollar questions: how much money can you borrow from the 203(k) program? (Okay, maybe it’s more like the hundred-thousand-dollar question.) There are many factors involved, but you will generally find that the loan will cover a reasonably-priced home plus basic repairs and renovations.
The amount will depend on the type of loan you get, including whether it is a purchase or a refinance.
If the loan is for a regular repair, without the purchase of a house, you will have to borrow a minimum of $5,000. In other words, if you want to borrow less than $5,000, you’ll have to look elsewhere.
With a regular FHA 203(k) loan, the maximum amount you can borrow is the lesser of two numbers. The first is FHA mortgage limits, which usually change annually and differ from area to area. (San Diego, for example, has different limits than St. Paul, Minnesota.) The second number is the LTV ratio multiplied through various factors. We won’t drag you down with the math (which includes factors like “after-improved values,” “financeable mortgage fees,” and “adjusted as-is values”); just know that whichever number is lowest is the amount you can borrow through 203(k).
Limited 203(k) Loans
There is also a subsection of the program that is called Limited 203(k) mortgages. This program has a component that allows you to make energy-reducing home improvements. Offering up to $35,000 in financing, this program allows homeowners to refinance their mortgage and borrow money that can be used to make improvements to a house. If you are considering home improvements, including pre-sale improvements, ask your lender about Limited 203(k) options.
Get Reliable Information on 203(k) and Other Renovation Loans
If you want to learn more about 203(k) loans from the FHA, contact San Diego Purchase Loans today. We’ll walk you through the process of getting the right loan for your remodeling project.
Whether you are buying a home that needs improvements or want an affordable renovation loan for your current property, we’ll make sure you understand all the details for every option, allowing you to make an informed, confident decision!