FHA 203k Loans Have Many Benefits

FHA 203k loans allow buyers to purchase foreclosures and short sales that are sitting vacant due to any rehab work needed to make the property move-in ready.

In addition to minor cosmetic upgrades, this loan can be used to completely remodel most 1-4 unit dwellings, and borrowers can even finance in up to 6 month's (principal, interest, tax and insurance) payments to avoid having to worry about additional housing costs while the property is being renovated.

• Finance Upgrades - Cosmetic to structural renovation work.
• Get What You Want - Buy a property, turn it into a home.
• Increased Values - Improve the re-sale value and save money.
• Energy Efficient Upgrades - Save on utility expenses.
• Low Downpayment - As little as 3.5% of the purchase price for FHA 203k loans.
• Perfect "Fixer-Upper" Loan - New paint, carpet, kitchen remodel... and the list goes on.
• Discounted Listings - Get a better deal when buying an ugly property that needs a little TLC.

As long as you have an experienced team of 203k lenders, consultants and contractors working for you, a rehab loan is an option you may want to explore.

203k Loan Overview

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Established by the Department of Housing and Urban Development (HUD) in a 1978 official amendment to Section 203k of the National Housing Act (NHA), this mortgage program was intended to serve as important tool for community and neighborhood revitalization, as well as for expanding homeownership opportunities.

Bottom line, this program helps preserve neighborhood real estate values, as well as creates employment opportunities for local contractors.

FHA's primary goal is to help borrowers purchase a home they may not otherwise be able to finance based on the down payment requirements of most conventional loan programs. To further that goal, FHA offers favorable loan terms, higher loan limits, and flexible down payment options to qualified buyers.

While candidates are not required to have as large a down payment or the income amounts mandated by many conventional loan programs, they will need to show evidence of a steady, verifiable income and a good credit history.

Credit qualification, loan limits and other requirements for all FHA 203k loans are the same as standard FHA loans. Borrowers must demonstrate the willingness and ability to repay the loan. Like standard FHA loans, maximum loan amounts depend on the property's geography (city, state, county).

The distinct difference between standard FHA loans in Boston, MA and the 203k programs is that 203k rehabilitation loans are specifically designed to offer loans on distressed, outdated, uninhabitable or poorly maintained properties that may be unable to qualify for conventional loan programs.

In addition to the purchase price of the home, the FHA 203k loan allows the borrower to project costs and include the funds needed for the rehabilitation and related expenses, such as materials and labor.

Boston 203k Loan Basics

There are only a few differences between qualifying for a 203k loan and a standard FHA program. Downpayment, credit and income / employment requirements are relatively the same, where as the property and appraisal valuation process is what sets these rehab loans apart.

Down Payment Requirements

As a down payment, a minimum 3.5% of the total amount of the home's purchase price plus the cost of repairs is required. Conventional loans typically require a 10%-20% down payment.

Contingency Reserve and Mortgage Payment Coverage

The 203k loan also allows the borrower to include a 10-20% contingency reserve for expenses above and beyond repair estimates, as well as up to six months of loan payments to cover the mortgage while renovating.

Two Types of 203k Mortgages

FHA offers two types of FHA 203k mortgages: the Standard 203k, (also called Full or Regular) and the Streamlined 203k. Both loan types can be used for purchase and refinance.

Streamlined 203k

The streamlined 203k is designed for homes that need cosmetic, non-structural modifications. The Streamlined loan allows home buyers to add a maximum of $35,000 to the purchase price to pay for improvements.

Standard 203k

The Standard 203k was created specifically for properties that need structural repairs, such as the relocation of a bearing wall.

Maximum Mortgage Amount

The maximum mortgage amount allowed for a standard 203k is based on whichever is less:

The as-is value of the property plus the costs of repair and rehabilitation, or 110% of the projected value of the renovated property.

Common 203k Loan Terms

Don't let a few new vocabulary terms overwhelm you about the process, it's your 203k lender's responsibility to clearly articulate everything you need to know about in a manner that you can clearly understand and trust.

Simply put, a rehab loan is basically a construction financing program that involves a few other components and team players.

For your reference, we have listed a few of the most common rehab loan terms below.

Contingency Reserve:

The 203k Contingency Reserve is a padding of additional funds, typically in the amount of 10%-20% of the total cost of the renovation. The lender will require a Contingency Reserve to cover overrun costs if the project goes over budget.

If the scope of work is relatively simple and repair costs are below $7,500, the lender may waive the reserve requirement. Subject to lender approval, the borrower may use unspent funds from the Contingency Reserve account to perform additional property improvements; otherwise, the monies must be applied to pay down the mortgage principal.

Draws and Inspections:

A draw is an approved release of funds to the contractor. The first draw will not be scheduled until the lender has determined that the applicable building permits have been issued.

Thereafter, inspections are performed by the HUD Consultant or HUD-approved lender's staff prior to the approval of a draws. Each inspection will determine whether or not the work has been completed and is compliant, and will indicate approval for funds to be released.

FHA 203k Consultant:

Borrowers who choose the full, standard 203k will partner with a HUD Certified Consultant on their loan.

The HUD) 203k Consultant's job is to provide knowledge and guidance during the renovation, and is tasked with protecting the homeowner and ensuring that the renovation is completed according to the homeowner's wishes.

Holdback:

A 10% holdback is required on each release from the Rehabilitation Escrow Account on all Standard 203k loans. The total sum of all holdback funds will be paid out only after the final inspection and release of the Final Notice.

The Streamlined 203k loan is designed with only two draws, and holdbacks are not applicable.

Lender Work Write-Up:

For the full FHA 203k loan, the HUD Consultant will prepare a detailed description of the property repairs needed. Using detailed line item descriptions and pricing, the Work Write-up will include the borrower's desired upgrades, as well as what will be required to satisfy the lender, FHA, and building code compliance.

Mortgage Payment Reserve:

Funds equal to six mortgage payments plus mortgage insurance (MI) can be included to cover monthly mortgage payments if the property will not be livable during the rehab project.

Mortgage Insurance (MI):

Two types of mortgage insurance may apply to a 203(k) transaction: An Upfront Mortgage Insurance premium, and a monthly mortgage insurance premium.

The Upfront Mortgage Insurance (UFMIP) is a one-time loan insurance fee collected on behalf of FHA at the close of the transaction. In addition to the UFMIP, a monthly mortgage insurance premium (MIP) is due on all FHA transactions.

Rehabilitation Escrow Account:

After the transaction is closed, the loan proceeds and the contingency reserve are placed in an interest bearing escrow account.

The lender will release funds through a draw at pre-specified stages in accordance with the Work Write-Up.

Scope of Work:

HUD 203k Consultant will use the Lender Work Write-Up to prepare a detailed Scope of Work designed to help contractors return the best bids possible.

Myths About Getting A Rehab Loan

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Even though the FHA 203k loan provides significant benefits to property values and employment opportunities, many local real estate professionals are reluctant to pay attention to these government insured rehab loans due to the misconception that they are impossible to close on time.

Yes, it is true that FHA 203k loans require an experienced team of renovation lenders, real estate agents, consultants and contractors to ensure a successful closing.

However, most real estate transactions require a certain level of experience to protect buyers and sellers, which is why you should strongly consider hiring a Rehab Loan Expert to help guide you through the qualifying and funding process.

If your current real estate agent does not have anything good to say about 203k loans, then please have them Contact Us about our Rehab Loan Training and Certification seminars. We're obviously very passionate about rebuilding the real estate market, and we believe education is the key to helping this program take root in our community.

Delays, confusion, endless paperwork, government interference, exorbitant costs, shady contractors, disappearing lenders, clueless real estate agents and disillusioned sellers who pull out of a deal…

These are a few of the falsehoods and myths about the 203k that are unfortunately getting undue media buzz and keeping qualified borrowers from purchasing or refinancing their dream home with the FHA 203k loan.

The 203k Is Not Just A Rehab Loan

One myth is that the 203k is only a rehab loan. Yes, it can be used to renovate a distressed property, but this unique loan is also ideal for undertaking a kitchen or bath remodel in an already-desirable home.

From structural renovations and repairs to wish-list improvements like carpet, cabinets and tile, this government-sponsored loan program allows the borrower to include their remodel expenses in one single, efficient FHA mortgage. The absolute best point about the 203k is that this loan allows you to borrow money based on how much the home will be worth AFTER the repairs have been completed, which means instant equity.

In many areas of the country, a 203k loan is helpful if you need water damage and mold remediation.

Time Is On Your Side!

Although some 203k loans may take a week or two longer than a conventional mortgage, depending on the type of renovation work required, our rehab loan experts can close the average FHA 203k in 30-45 days.

The fact is, a typical 203k should close in roughly the same time frame as most other loans. The secret is working with an experienced lender with a network of Certified Consultants and proven, qualified Contractors who are familiar with and knowledgeable about the 203k process.

The 203k Requires Too Much Paperwork

While more paperwork is required, the documentation process isn't tedious if you are working with an experienced Renovation Team that knows the ropes. Keep in mind, almost every mortgage requires a bunch of paper-chasing.

Borrowers must work with FHA 203k experts who know the loan, understand the process, and are proactive about producing and processing the required paperwork and effectively moving the loan forward.

Bottom Line: Most borrowers and agents who report a bad encounter with the 203k did NOT work with a trained, certified, knowledgeable Renovation Team who had their best interests in mind.

You don't need to travel the same road! Choose a 203k lender in Boston, MA with an established track record who fully understands government requirements, who has excellent Contractor and Consultant contacts and who can guide you through the ultimate myth-busting FHA 203k loan experience.

Rehab Loan Options in Boston, MA

There are many types home improvement and construction loans that are created to help homeowners or buyers renovate a property.

This site is dedicated to providing a comprehensive online educational resource that focuses specifically on FHA, Fannie Mae and Energy Efficient Mortgage programs.

The following list outlines a few of the most popular home improvement loans, along with a link to a related page that will give you more information:

FHA 203k Streamlined Limited Repair Program

Basic cosmetic (non-structural) repairs and property upgrades. FHA's Streamlined 203(k) program permits homebuyers to finance up to an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser.

More Info: FHA 203k Streamlined Limited Repair Loan
HUD Reference: HUD Mortgagee Letter 2005-50

FHA 203k Standard Full Structural Loan

The Standard 203k was created specifically for projects that warrant extensive work or repairs, projects that will take longer than six months to complete, or when rehab costs will exceed $35,000. This option must be used when a property requires (or the borrower requests) structural work, such as a room addition or the removal or relocation of an interior or exterior wall.

Additionally, Standard 203k loans have no maximum repair amount.

More Info: FHA 203k Full

Fannie Mae HomePath®

HomePath Mortgage allows a buyer to purchase a Fannie Mae-owned property with a low down payment, no lender-requested appraisal and no mortgage insurance. Expanded seller contributions towards closing costs are allowed. The one loan amount includes both the funds for the purchase and renovation — up to 35% of the as completed value. Available for owner occupants and investors.

More Info: Fannie Mae HomePath®
Official Site: HomePath.com

FHA's Energy Efficient Mortgage program (EEM)

FHA's Energy Efficient Mortgage program (EEM) helps homebuyers or homeowners save money on utility bills by enabling them to finance the cost of adding energy efficiency features to new or existing housing as part of their FHA insured home purchase or refinancing mortgage.

More Info: Energy Efficient Mortgages
HUD Reference: FHA Energy Efficient Mortgages

Hiring An Expert 203k Lender

There is a big difference between Saying you're the Trusted Resource for Renovation Lending, and actually Proving it.

RehabLoanNetwork.com is a national expert network of 203k lenders who specialize rehab loan programs that provide homebuyers special financing options for fixing up properties.

By organizing a dedicated group of qualified Rehab Lenders, 203k Consultants, Contractors and Real Estate Agents in one centralized community, we can better serve our local clients, transaction partners and the real estate market by providing our members with:

• Extensive Training on guidelines, underwriting & processing systems
• Breaking News on important updates that relate to lending portals
• Networking with other Renovation Lending Experts
• Coaching to improve service, communication and efficiency
• Accountability to ensure the integrity of our network

We believe that with the proper education and community involvement, the FHA 203k loan program can stabilize the real estate market and create employment opportunities for the construction industry.