Written by: Amy Fontinelle and featured on forbes.com
If you’re looking at a fixer-upper, the Federal Housing Administration rehab loan may be the mortgage for you.
Are you interested in buying a fixer-upper, but don’t have the cash to remodel it? Or maybe you have saved money for remodeling and you’ve found a house you love, but your lender won’t allow you to buy it because the house isn’t considered habitable without toilets.
There are always properties on the market that weren’t maintained by cash-strapped former owners, were treated poorly by renters or were deliberately trashed by formers owners before they lost their home to foreclosure. Shouldn’t there be a way for someone like you to fix up these neighborhood eyesores and bring them back to life?
A Gift From the Government
There is, and it’s brought to you by the federal government. The Federal Housing Administration’s rehab loan product, the FHA 203(k) loan, was designed for individuals who want to rehabilitate or repair a damaged home so they can live in it as their primary residence. These loans are endorsed by the government to encourage lenders to offer what would otherwise be considered a risky loan product. Because of the risk and expense involved, rehab projects are normally handled by professional real estate investors who can buy properties with cash and therefore don’t need any bank to approve the property’s condition.
This article will describe how much money you need to save up, the two different types of 203(k) loans, eligible properties, eligible repairs, how to apply and more–in short, what you need to know to determine whether this type of loan is right for you.
How Much Cash You Need
The FHA 203(k) loan lets you include the money needed for repairs and related expenses in the loan, such as materials and labor. If you wanted to buy a home in which the kitchen had been ripped out, you could include in the loan the price of new cabinets, counter tops, flooring, a fridge, stove, oven, microwave, sink, dishwasher, garbage disposal, and the cost to design, permit and install it all. The loan can also include a 10-20% contingency reserve for expenses above and beyond your repair estimates. You can also get up to six months’ worth of mortgage payments included to cover the mortgage while you’re renovating the home, so that you won’t have to make a double housing payment.
As of early 2010, you only have to come up with 3.5% of the home’s purchase price plus repair costs to buy a house with this type of loan. So if you were buying a house whose asking price was $150,000 and that needed repairs of $15,000, you would need 3.5% of $165,000, or $5,775, as your down payment. Of course, you’ll also have to meet the usual borrower requirements for an FHA loan, like having a steady, verifiable income and a good credit score.
According to the FHA, “All persons who can make the monthly mortgage payments are eligible to apply” for a 203(k) loan. To find a lender in your area who is experienced with FHA 203(k) mortgages, use the search tool at http://www.hud.gov/ll/code/llslcrit.cfm and check the box for 203(k).
Types of 203(k) Mortgages
There are two types of FHA 203(k) mortgages: regular and streamlined (also called “modified”). Regular 203(k)s are for properties that need structural repairs; streamlined are for those that need only non-structural repairs. Either can be used for purchase or refinance.
For the regular 203(k) purchase loan, the maximum mortgage amount is based on the lesser of the as-is value of the property plus rehab costs or 110% of the expected value of the property after rehab. This means that you wouldn’t want to buy a $150,000 house if it needed $25,000 in repairs unless you had an extra $10,000 in cash, because the most you could borrow would be $165,000. The streamlined loan allows home buyers to add a maximum of $35,000 to the purchase price to pay for improvements.