Financing Your Home Renovation
Imagine you find your perfect home. Only it needs a little work. Probably easy to imagine that in our heated realty market. The FHA 203K mortgage might be your ideal solution. It allows you to wrap the costs of your remodeling into the initial financing. No need to slowly make improvements, you can do all the work before you move into your new home! Pretty sharp, right?
Borrow Against The Value After Improvements
The best part of an FHA 203K renovation package is that you can borrow against the future completed value. That’s right, the appraiser will take into account what the home will be like after the improvements are made.
For instance, you find a great location, but the house is dilapidated, the appliances are old, there are no window coverings and the carpet reeks of cat pee. This is the ideal home to purchase using a 203(K) program.
The appraiser will look at neighborhood comparable homes and take into consideration what this house will be worth after the new hardwood floors and carpeting, fresh paint, new stainless steel appliances and Hunter Douglas appliances are all installed inside.
And, the appraiser isn’t looking at the existing poorly maintained structure, but is comparing the future restored home with the neighborhood comps.
The house then appraises for the hundred thousand over in repair costs and you are able to have your contractors do all the work. It’s that simple (although, there are some specific rules about contractors, appraisal, maximum loan size, etc.).
The FHA 203K Home Mortgage is a great way to remodel a home with a good location, but in need of work.
An FHA 203K mortgage is going to offer a single closing, one loan, a payment buyers understand in advance. The program is open to borrowers of all income levels. It is available on nearly any property. It isn’t just for blighted inner city listings. Your credit score can even be slightly dinged up like the home you are buying!
Eligible FHA 203K Properties
- Single Family Residence
- HUD owned property
- Bank Owned / REO
- Town Homes
- (Most) owner-occupied 1 to 4 unit plex/mixed used
Note: Mixed use (say a shop on ground floor, housing above) can only have financed improvements to the residential portion of the unit. Multi unit/plex style homes must be self sustaining. The monthly debt service cannot exceed net rents. For condos, the maximum mortgage amount is 110% of the after-improved value.
Once a property is identified by a home buyer, the purchaser works with a contractor. And the contractor submits work plans and specifications to the mortgage lender. An appraiser than reviews the plans and determines the “as completed” value. The loan/purchase is closed. Renovation funds are placed into a custodial account. Contractor completes work and is paid. In some instances, there is a draw for materials. The lender tends to hold some of the funds until a final inspection is completed.
The program is limited to the maximum FHA county loan limit. Borrowers must have a credit score of at least 620. There is no cash out or debt consolidation. Self dealing is not allowed. For instance, you are a contractor and plan to do all the work yourself. This isn’t allowed in the program. However, you may know a great painter,excellent flooring specialist, etc. You can select Trades that you work with to do the work.
A contingency reserve will be assessed as part of any project to protect against unforeseen cost overruns.
Not All Lenders
This program isn’t for everyone. With a niche mortgage product like this, its best to work with a specialist. This sort of mortgage can take longer than an average property for the closing period. The work is completed immediately after closing, but it can take several months on bigger projects.
One lender I frequently recommend for this type of project is Frank Giuliano with Academy Mortgage
Eligible Improvements for a Full 203(K)
- Floor treatments (Hardwood, carpeting, tile)
- Structural Repairs
- Energy Efficiency
- Storm Shelters
- Plus cosmetic changes such as paint, window coverings and appliances
Bob Gordon Boulder Real Estate News Recommends More Mortgage Resources
Another less frequently employed yet equally unique mortgage program is the VA home mortgage. This program is known allowing 100% financing for US military veterans. There are unique rules and regulations. To learn about the process, read Luke Skar’s Inlanta Mortgage blog. It covers all the bases.
When financing a home, there are two major hurdles. The final loan approval and the home’s appraisal. Check out this BLOG I posted all about the home mortgage appraisal process.