So you’ve started to look for a house and are quickly realizing that everything in your price range “needs a little work”, or you’ve found a perfect house, but there are a few repairs that need to be made and that makes the purchase a little or a lot beyond your budget. All is not lost! Introducing a potential saving grace, especially designed for just this situation and a great help to anyone purchasing a home and especially first-time homebuyers!
203K Loans are available through the FHA (Federal Housing Administration) to help buyers finance or re-finance both the mortgage and home improvement costs into one loan. The loan amount is based on the projected value of the home after the improvements. There are two types of 203K loans:
- Streamline 203K
- Up to $35,000 for improvements
- Used for cosmetic repairs like, new carpet, kitchen, bath, roof, painting
- No HUD Consultant needed
- Work must be completed within 6 months after closing
- Funds are dispersed in 2 payments
- Full 203K
- More than $35,000 for improvements
- Used for structural repairs like adding rooms, replacing sills, pouring a new foundation
- HUD Consultant required
- Work must be completed within 12 months after closing
- Funds are dispersed 2-5 times and all work permits must be in place before the first payment
The best part is, because they are secured by HUD (U.S. Department of Housing and Urban Development), the loans only require a 3.5% down payment which makes it very favorable for first-time home buyers. The details are a little complicated, but if you qualify, and are willing to do a little leg-work, the extra effort will have great long-term rewards.
There are a few eligibility requirements:
- You must live in the home
- The property must be a single family home or up to a four family dwelling built a minimum of one year prior to the borrower’s 203K loan application
- Condos are also eligible, but must meet specific criteria
It is highly advisable to work with a lender who is familiar with FHA loans to help you through the process as it is a little more complicated than a conventional loan. It will make the whole process easier to work with someone who can help you avoid any issues and prepare you for what you need to do to secure the loan. Working with a knowledgeable FHA lender will make all the difference!
In addition to producing the normal paperwork associated with the loan process – copies your social security card, drivers license, two years of tax returns, two months of bank statements and two current pay stubs, you will also be required to get professional estimates of the cost of repairs to provide to the lender during the 45-60 day period before closing. This is where the extra effort lies and it’s important to work fast to get estimates and all the information you need to submit with the loan package. Most of the time, getting estimates will involve selecting a general contractor, so interview a few and when you find one that you like and can work with, let them know you will need three (3) recommendations, license and insurance information from him and each sub-contractor working on the project. There will also be an initial appraisal of the property without the remodeling. When all the paperwork is in, the loan package can be submitted.
Once the lender approves the loan for the purchase amount, work must begin within 30 days after closing.
The additional money for the improvements will be held in escrow and based on the contractor’s assessment of the remodeling costs. The 203K loan is dispersed twice for the Streamline 203K and 2-5 times for the Full 203K. The final amount will be dispersed when the improvements are shown to have met and passed all FHA requirements. The lender can hold the final payment if the improvements don’t meet its guidelines at the time of final inspection, so it’s important to plan appropriately with your contractor.
One of our recent homebuyers used the 203K Loan to purchase their latest property and said that even thought the paperwork is time-consuming, “it was well worth it, since we (he and his wife) could make the home improvements to our own taste, creating our home the way we wanted it.”
For more information about 203K Loans and other tips for purchasing your home on in Rhode Island, talk to one of our agents at therhodeguide.com. Buying a house in Providence or Rhode Island might be easier than you think. There is no better real estate company to work with than therhodeguide.com when searching, listing or purchasing your home!
HUD website with detailed information on 203K Loans: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou