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FHA 203k Rates and Requirements – 2016

2 what is fha 203kSo, you have finally come across the house of your dreams in a neighborhood of your choice. 

The only hitch is that the house needs some fixing up and your bank won’t lend you money to buy such a property.

You can avail loan from a private money lender but it has its drawbacks.

The rates are high and the loan period is between 6 months to a year – a problem for anyone dependent on loans to buy a house.

Is there a solution to your predicament? Yes, thankfully the lawmakers have foreseen such a scenario and have come up with the FHA 203krehab loan program. The Federal Housing Administration (FHA) is the Department of Housing and Urban Development’s (HUD) division responsible for administering loans to new buyers of residential properties.

The FHA is not involved directly in this program. It empowers certain lenders to grant loans to individuals who want to purchase a home which needs repairs.

What is FHA 203k?

The FHA 203k is a renovation loan program under the HUD which provides loans for purchase and repair of property under a single mortgage.  This loan is offered to only owners who will reside in the house once it is repaired. Approved money lenders will disburse the funds to the owners to purchase and do the needful repairs.

A contract is drawn to determine the kind of renovation work needed and which contractor will undertake the same. The FHA 203k loan has been designed in such a way that only minimal paperwork is required when applying for a loan.

What are the requirements for a FHA 203k loan?

Like any other FHA loan the 203k also has the same requirements like:

  • A credit score of 620 is acceptable even though 650 is considered the most ideal; the exact score will depend on the lender.

  • The present guidelines state that the debt to income ratio must be 41% to 45%. This is a window to the lender on your financial status.

  • You need a minimum of 3.5% down payment.

  • The purchase amount and the renovation cost together must be lower than the total loan limit.

  • Only owner occupants are eligible to apply for this loan.

  • First time home buyers are eligible. Anybody who hasn’t bought a house in the past three years is considered a first timer.

Thus, we see that the only difference between a FHA loan and FHA 203k loan is that in FHA 203k the purchase price and the renovation price must together qualify.

What are the types of FHA 203k loans? 

There are two types of FHA loans:

  1. The Standard 203k: This loan is meant for structural changes that involve architectural drawings and inspections. This kind of renovation involves landscaping, and constructural changes to rooms, garages and kitchen.
  2. The Streamlined 203k: This loan is now known as Limited 203k loan.It ismeant for simpler and less expensive and extensive kind of renovation. These repairs will not require expert advice and any architectural designs and drawings. These repairs will not be subject to many inspections.

What is FHA 203k Streamline loan?

This is a single loan for purchase and renovation. This loan can be availed by the first time buyer or anyone who needs minor repairs for their existing house. This loan can also be used by all income levels.

  • Types of streamline loans are
    • 30-15 years of fixed interest
    • One year of ARMS.

 

  • The properties eligible for streamline loan are
    • Single dwellings
    • Condominiums
    • Town houses
    • One to four units building
    • Mixed use( both as residential and commercial)

 

The table below will provide you with list of eligible and ineligible repairs under the streamlined 203k loan

Eligible

Ineligible

  • Some minor modernization work, especially kitchen which does not comprise any constructural repairs
  • Major overhauling and restructuring of walls or other load bearing structures
  • Painting  in-house and eternal walls and lead based paint stabilization
  • Adding new rooms and building new structures
  • All plumbing and electrical upgrading, repairs and replacement
  • To repair any extensive structural damages
  • The existing flooring can be repaired or replaced

 

  • Any repairs involving architectural drawings and engineering
  • Roof, gutters and downspouts can be repaired or replaced
  • Renovation work that comprises of more than two payments per contractor
  • HVAC systems can be replaced or repaired
  • Landscaping and any additional curb enhancingchanges
  • Installing of storm windows, insulation, weather stripping and weatherization

 

  • Any work that prevents the owner-occupant from staying on the property for more than 30 days during rehabilitation
  • All electronic appliances like dishwashers, refrigerators, microwave ovens, dryers and other free standing cooking ranges can be replaced, repaired or upgraded
  • Work that will initiate a consultant to create a work write-up

 

  • Any accessibility changes that can help people with disabilities
  • Repairs and work that require more than six months
  • Changes to basement sans structural changes but involving finishing, remodeling and waterproofing and weather proofing
  • Does not involve foundation work
  • Adding ,repairing and replacing decks, patios, and porches
  • Swimming pool repairs and building new ones
  • All doors and windows can be replaced

 

  • Building a gazebo, new tennis court or a bathhouse
  • Repair and replacement of septic tank and well

 

  • Any additions that will make the property to be used as a commercial venture

 

What is standard 203k loan?

This loan is reserved for repairs that require more than $ 35,000 and involve extensive structural changes that require architectural designs and drawings.

The table below gives a quick insight into the various repairs that can or cannot be undertaken with this loan.

Eligible

Ineligible

  • All kinds of constructural alteration and additions
  • Building a new tennis court
  • Can add a new Garage
  • Building a Gazebo or bathhouse
  • Structural changes to the kitchen and the bathroom
  • Any changes that will lead to the venue been used for commercial purpose
  • Installing all electronics appliances
  • Extensive beautification like using photo mural
  • Any change will make the house energy efficient and reduce maintenance
  • Installing a dish antenna or a Television antenna
  • Repairing an existing swimming pool within 1500$
  • Building a new swimming pool
  • Upgrade or modernize plumbing, heating, air conditioning and other electrical works
  • Addition of outdoor BBQ pit or fireplace
  • Repair or install a new septic and well system
  • Addition of any kind of  luxury items
  • Repair or install roofing, gutters and downspout
  • Installing a new flooring, tiles or carpets

 

What are the differences between standard and streamline?

Standard

Streamline

·        Not capped at 35000

 

·        Capped at 35000 in repairs
·        Requires more paperwork ·        Less paperwork
·        The house need not be habitable during renovation ·        The house should be livable during repairs and renovation.
·        Payments are made differently. A consultant will review the progress of work and release payment as each phase is completed. ·        Payment to contractors is done at the beginning and at completion.

 

PDF]Freddie Mac Standard and Streamlined Modification Reference Guide

 

2 fha 203k rehab loanWhich contractors are eligible to do the repairs under 203k?

For a contractor to be eligible to undertake repairs or rehab work under the streamlined 203k program certain criteria is needed. The contractors have to submit the following documentation before starting work:

  • License copies of business as required by the state and municipality
  • Insurance proof
  • At least three business references from the same kind of jobs done previously
  • Agreement between the owner and the contractor
  • Profile of the contractor and acknowledgment of the contract
  • W-9 form with the full name as shown in the federal income tax returns.
  • Detailed contractor bid with details about the labor costs and the material cost clearly mentioned.

Those who are taking the standard 203 k loans, the contractor must also submit an additional work write up which includes the estimated costs of the repairs.

What are the interest rates for rehab under 203k?

To minimize your expenditure and maximize the output, the owners and the borrowers who are using the 203k should keep a close watch on the interest rates. The interest rates of 203k wavers daily based on the market condition. It is difficult to read the market and look out for better interest rates. Hence it is advisable to seek professional help of someone who monitors the rates on a regular basis.

The FHA rates have consistently remained low since 2010. The present FHA loan rate is hovering around 5.4 % for the 30 year fixed rate which is considered good since two years ago it was 6 %.  The 203k rates are always 0.25% to 0.50% higher than the FHA loans. But the interest rates of 203k are anyday lesser than the rates offered by hard money lenders for rehab and renovation properties.

2 fha 203k streamlineWhat are the advantages of FHA 203k?

  • Savings remain intact: Repair and renovation is an expensive affair and your savings might not be sufficient. To protect your savings the 203k loan is the best option because you can repair your house with loan insured by the government. This way your savings can be there for a rainy day.
  • Lower interest rate: Interest rates on rehab loans are always high and end been expensive; in contrast the FHA 203k loan is offered at better interest rate.
  • Better deals: The FHA 203k allows you to buy property at a lower price than the market price.
  • Build Home Equity: By repairing and renovating your home you can improve the equity of the home.

What are the Disadvantages of 203k?

  • Long process: The whole processof loan application and approval is long drawn and can take up to 45 days sometimes.
  • Binding contracts: You can avail a 203k only after a contractor has quoted his price and the lender has approved of him. But in case midway if you are not happy with the contractor then you have no way out for the rest of the rehab process.
  • Listing agent confusion: Many listing agents are unaware of the rules and regulations of the FHA 203k program, as a result your offer may not be accepted and in turn you can’t avail the loan.

How does the FHA loan work?

Once all requirements like finding the right property, an approved lender, contractor, debit to income ratio and credit scores are met, a closing date is announced. Once the loan is closed a repair Escrow account is set up. The repair works must start within 30 days of closing the loan and must be completed within 6 months.

In case of the streamline 203k loan the contractor receives 50% of the total renovation fees immediately after loan is closed and the balance after the work is completed. In the case of standard K loan a consultant will survey the repairs carried out and release funds accordingly. In either case any balance amount will be added to the principal loan.

What kind of lenders and contractors should you choose?

There is still a vast segment of contractors who are not well versed with the 203k loan program. Hence to make matters easy for yourself, you should identify contractors who are familiar with this kind of work. Often the lenders themselves will suggest contractors who can do this work. This is essential because the payment schedule and the paperwork involved are a little convoluted.

The contractor whom you have identified has to be approved by the lender too. The lender will investigate if the bid is appropriate and the charges are reasonable. The lender will release loan based on the current value of your house and the rehab costs put together. Most of the lenders will require a title policy which states that the contractor has been paid in full and no liens are outstanding.

Is FHA 203k the right solution to home repair woes?

Obtaining an FHA 203k mortgage is a laborious and long drawn process but when your savings are practically nonexistent and your home equity negligible you have no choice.You should research and find out a lender who has plenty of 203k experience before you apply for a loan to avoid future hiccups.

Then ensure that you find a contractor well versed with the payment schedule and the paperwork required for 203k financing. He should keep track of all receipts and proofs for the work done for later inspection by the consultant.

So to make your dream house a reality the FHA 203k rehab loan is an ideal option because with your savings intact you can renovate your home while making affordable monthly payments.

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