August 10, 2015 by Leave a comment

Home renovations: old house with siding removed on new styrofoam foundations

Human beings have always had a fascination with transforming lesser things into greater ones. In ancient times, alchemists tried to convert base metals into gold; now, ambitious home buyers seek to transform run-down residences into dream homes. If you’ve ever felt drawn toward the latter, you’ll want to know about the FHA 203k loan.

Because the properties aren’t in the best shape, you might think you’d be able to make a purchase and have enough money left over for improvements. However, complete home restorations can take some serious cash. And sometimes, a lender will not approve your loan due to the “uninhabitable” state of the residence. Fortunately, there is the 203k loan.

Backed by the Federal Government, the 203k loan is specifically for people seeking to purchase and renovate a home. There are several types of improvements available under the 203k loan. Here are some examples listed on the government website:

  • Structural alterations and reconstruction
  • Modernization and improvements to the home’s function
  • Elimination of health and safety hazards
  • Changes that improve appearance and eliminate obsolescence
  • Reconditioning or replacing plumbing; installing a well and/or septic system
  • Adding or replacing roofing, gutters, and downspouts
  • Adding or replacing floors and/or floor treatments
  • Major landscape work and site improvements
  • Enhancing accessibility for a disabled person
  • Making energy conservation improvements

Depending on which project you plan on undertaking, there are two possible 203k loans to choose from.

1. Standard 203k

If your project requires engineering or architectural drawings and inspections, it would fall under the regular 203k loan. Usually, this means complicated projects that deal with structural damage, or anything else that prevents you from living there.

Examples:

  • Relocation of load-bearing walls
  • New construction (only if adding to existing structures)
  • Landscaping of a property (if it addresses health/safety issues)
  • Repairing structural damage to a home
  • Minimum cost of $5,000
  • Project must be completed in six months (lender can approve extensions)

2. Streamlined 203k

For simpler projects that do not require the use of a consultant, architect, and engineer, or that will not exceed $35,000 there is the streamlined 203k. There are less hoops to jump through with this option, allowing you to complete your project faster.

Examples:

  • HVAC repair/replacement
  • Roof, gutter, or downspout repair/replacement
  • Home accessibility for disabled persons
  • Minor remodeling
  • Basement finishing, which does not involve structural repairs
  • Interior or exterior painting
  • Exterior patio or porch addition
  • Septic system repair/replacement

What properties are eligible?

  • 1-4 family home
  • Torn down homes (as long as some of the foundation remains)
  • A home that you want to move to a new location
  • Some condos are eligible
  • The property will also have to pass the standard FHA requirements, which includes a maximum value, which changes depending on the property’s location.

Refinancing

If at some point, you would like to refinance your 203k loan into a conventional mortgage, you may do so as long as it has been six months since you got the 203k.

Drawbacks

The 203k loan may seem like the perfect solution for your fixer-upper project, but it does have some drawbacks. Mainly that there is a cap on the amount of funding, and the application process is a bit on the complicated side (it’s possible you’ll need to hire external help when preparing a detailed proposal for the project). While this might seem daunting to some, if you are dead-set on turning that dilapidated property into the house of your dreams, these are only minor obstacles.

Carter Wessman is originally from the charming town of Norfolk, Massachusetts. When he isn’t busy writing about mortgage related topics, you can find him playing table tennis, or jamming on his bass guitar.


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