Financing for Rehabs & Renovations
As the mortgage and credit crisis continues, the Federal Housing Administration (FHA) is becoming a lifeline for homebuyers seeking affordable mortgages. In fact, according to the U.S. Department of Housing and Urban Development the number of FHA-backed home loans rose from 3.7% in 2006 to 21.1% in 2009. Why are FHA loans so attractive? Because they have a lower down payment requirement of 3.5 percent of the purchase price, more lenient underwriting criteria and offer better pricing. FHA loans are making it possible for first-time homebuyers and those with less-then-perfect credit to take advantage of today’s lower home prices.
One particularly useful tool in the FHA arsenal of loans is the 203k “rehab loan”, intended for neighborhood and community revitalization. This particular FHA loan is not new to the market, its just been flying under the radar of consumers, mainly because it was generally easier to take out home equity loans. Not so any more as deteriorating real estate prices have erased equity for millions of Americans..
The beauty of the FHA 203k loan is that when qualified borrowers (meeting FHA’s normal underwriting guidelines), purchase a property that needs major rehab or just cosmetic repairs, they can finance:
* The purchase price of the property
* Closing costs
* Repair costs
* Up to six months of mortgage payments (for larger rehabs)
To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. The total amount can be as much as 110% of the value after rehab under the standard 203k, or up to $35,000 under the streamlined 203(k). And, the FHA 203k can be applied to a refinance situation as well.
In a tough economic climate, this kind of assistance can make a huge difference, because sellers can’t afford to do extensive home repairs, but may be desperately in need of selling a property to avoid foreclosure. Buyers who have a rehab mortgage can get a great deal on a house and then immediately enhance their equity, which might be otherwise impossible with conventional financing.
Luxury items and improvements are not eligible as a cost rehabilitation. However, the homeowner can use the 203k loan to finance such items as painting, room additions, decks and other items even if the home does not need any other improvements. Important to note is that all health, safety and energy conservation items must be addressed prior to completing general home improvements. Home improvements don’t require the involvement of a general contractor, so do-it-yourself buyers with construction expertise can do the work themselves.
Although the FHA doesn’t actually make mortgage loans to homeowners, it provides insurance to protect lenders. In other words, your lender accepts less risk with an FHA loan because it’s insured in the event that you default on your mortgage payments. To see if you qualify, talk to your lender about this type of program, and as always, shop around for the loan program that makes most sense for you.