Think Outside The Box With A Rehab Loan

Joan Shaffer January 18, 2017 Buyers Buying Financing Your Home

Finding a “handyman’s special” can be a good news/bad news story. On one hand, most homes in need of serious repairs or renovations will be priced lower to compensate for the problems. That’s the good news. The bad news is that most mortgage loans provide only permanent financing, and the cost of those repairs may be out of your financial reach. Such scenarios often force the buyer to seek three loans: one to purchase the dwelling; interim financing to fix the home; then permanent financing when the work is done. This process can be expensive and time consuming. Fortunately, the FHA’s 203(k) program is perfectly suited for such a situation because it allows a borrower to obtain just one mortgage loan to finance both the acquisition and rehabilitation of the property.

The 203(k) program can also be applied to refinance transactions. For example, if a borrower wants to refinance to rehab their home, they can borrow enough money to pay off the existing mortgage on their home, plus the rehab costs and closing costs–up to 97% of the As-Improved Value. The FHA 203(k) loan limits are the same as the FHA loan limits. These loan limits vary, so call and ask what the limits are for any Colorado county.

On a purchase transaction, the cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor (though exceeding $5,000 in cost) to virtual reconstruction. A home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. Section 203(k) insured loans can finance the rehabilitation of the residential portion of a property that also has non-residential uses; they can also cover the conversion of a property of any size to a one- to four- unit structure.

Here’s a brief look at improvements that qualify:

• Remodeling of any rooms for improved functions and modernization; roofing, exterior siding, gutters and downspouts; flooring, tiling and carpeting; energy conservation improvements; major landscape work; improvements for accessibility to the handicapped; to finish basements, decks or patios…and much, much more.

When financing either a FHA 203(k) renovation purchase or refinance transaction, borrowers must keep in mind that the interest rate on this type of renovation loan is typically a half percentage point higher than the standard FHA basic loan.

To qualify for a 203(k) loan, you’ll need to meet the same requirements as any other FHA loan. A credit score of 580 or higher requires a 3.5% down payment. Applicants with lower credit scores will have to put down a 10 percent down payment. FHA national loan limit ceilings increased to $625,500, as of January 1 of this year.

This kind of loan may not work for you, but what’s important to remember is that there are numerous unique programs out there that you may not know about. From traditional financing methods, to national programs like the 203(k), or Colorado programs such as those offered by the Colorado Division of Housing, smart buyers will want to review their options before making a loan commitment. To help with that aspect of buying, don’t hesitate to call so we can discuss your needs–and how we can work together to make your real estate dreams a reality in 2017.

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