FHA 203k Mortgage Loan Basics
How Do I Qualify For FHA 203k Mortgage Loan:
FHA 203k Mortgage Loan programs are an excellent way for a home buyer to get a home purchase mortgage loan as well as a rehab loan at the same time. There are two different types of 203k loan programs. The first is a 203k loan streamline which limits the rehab 203k loan to a maximum of $35,000 in repairs. The other 203k loan program is the full 203k loan program that offers no limit on the construction and rehab budget, however, there is a $5,000 minimum. We will be discussing the full 203k loan program on this blog. 203k loan can be utilized in both refinance and purchase transactions. If you currently own a home and want to do an addition or major repairs, you can do a 203k refinance loan.
Why Full 203k Mortgage Loan Programs?
If you are intending in purchasing a REO, foreclosure, or short sale and the home needs extensive work and you want to do an addition to the existing home, a 203k loan will be perfect for you. You can do new kitchens, bathrooms, finish the basement, finish the attic, and do room additions or even do a two story addition with a full 203k loan. Structural repairs, electrical upgrades, plumbing upgrades, heating and air conditioning upgrades, major hard landscape upgrades, termite, mold, asbestos remediation, and new free standing appliance replacement are all items that are allowed on full 203k loan programs.
Not Allowed On Full 203k Mortgage Loan
There are scope of work that are not allowed on FHA 203k Mortgage Loan programs. Luxury work such as installation of hot tubs and swimming pools are not allowed and prohibited under FHA 203k loan programs. Unattached business structures such as pole buildings, sheds, barns, are not allowed under the 203k loan program. Business purpose repairs and/or additions are not allowed. For example, you can do an addition to your home but the addition cannot be used for business purposes. New construction homes are not covered under FHA 203k loan program. For example, if you are buying a home from a builder, you can purchase the new home under the regular FHA insured mortgage loan program but cannot do a 203k loan. 203k loan programs are for existing older homes that are in need of major repairs or for homeowners who want to do additions to an existing older home where value can be added.
Property Eligibility Requirements
Mixed used and commercial properties do not qualify under the 203k loan programs. Co-ops and non FHA approved condominiums do not qualify for 203k loan programs. No demolition. You cannot demolish the current home and build a brand new home. Parts of the home can be demolished and gutted, however, a complete demolition does not qualify. A home cannot be relocated from one location to another. The repairs need to be done on a home that sits on the current foundation.
Hiring A General Contractor For FHA 203k Mortgage Loan
Homeowners cannot be their own general contractors. You cannot hire cousin Vinny to be your general contractor nor any family members, relatives, or close friends. General contractors need to have an arm’s length relationship with the homeowner or else, it is a violation of the terms and conditions of the 203k loan program.
FHA 203k Mortgage Loan Qualification Requirements
Any home buyer that qualifies for FHA insured mortgage loan can qualify for a 203k loan. The higher your credit scores, the higher debt to income ratio that is allowed on a 203k loan. There will be one appraisal, an as is appraisal and as complete appraisal and the loan is based on the as complete appraisal and the 3.5% minimum down payment of the as completed appraisal will be required. For example, if the property you are purchasing is $100,000 but the as completed value will be $200,000, 3.5% of the $200,000 will be required as your down payment. When you close on your 203k loan, you are allowed to move in to your home and can live in your home while repairs are being done. If you cannot live in your home due to the heavy constructions, six months of your mortgage payments can be escrowed and you can live elsewhere. The construction needs to begin within 30 days from the closing date and the construction cannot take longer than 6 months. The general contractor is allowed up to 5 draws and no upfront draws are given to the 203k general contractor. With 203k streamline loans ( Loan up to $35,000), a 50% upfront draw to the general contractor is allowed prior to the start of work but on full 203k loan programs, no upfront draw is allowed. You need to hire a HUD approved consultant. It is your choice on which HUD approved consultant you hire. The HUD consultant will charge a fee between $400 and $1,000 depending on the dollar amount of your construction project. The HUD consultant will work very closely with your general contractor and is responsible for ongoing inspections and the final inspection.
Contractors And Sub-Contractors
Your general contractor needs to be licensed if it is required by the state and county where the subject property is located. Many states and municipalities do not require a general contractor to be licensed and if that is the case, it is alright. However, the general contractor needs to have proper insurance for the project. All of the subcontractors under the general contractor needs to be licensed and insured. For example, if the general contractor subcontracts with an electrician, plumber, architect, and other trades, they all need to be licensed, bonded, and insured.
Excess Construction Funds
In the event if the whole construction budget has not been utilized, the left over funds cannot go back to the homeowner. All unused construction money goes back to pay down the principal amount of the mortgage loan. The maximum amount that can go back to the 203k loan borrower is $500.00.
Need Advanced Planning On FHA 203k Mortgage Loan Programs
If you want to participate in a FHA 203k loan program, you need to be prepared for much advance planning. You need to collect all bids and most likely hire an architect if you plan on doing an addition. All drawings, bids, and scope of work budgets need to be prepared and completed prior to you 203k loan to close. If you have any questions on getting a 203k loan, please feel free to contact me at 262-716-8151 or at www.gustancho.com . I can refer you to architects, general contractors, and realtors who are qualified to represent you.
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