So, what is a renovation loan anyway?

An FHA 203k renovation loan is one FHA mortgage loan used to purchase (or refinance) a property and renovate it.  The most common form of the loan is classified as a “streamline” 203k which caps the amount of the renovation at $35k and the scope of the work to non-structural & eligible improvements (eligible repairs below).

Let’s take a home purchase of $100k, for example.  The buyer would like to remodel the kitchen, bath rooms, and flooring throughout the house for a total of $25k in improvements.  The purchase contract is executed with the seller for $100k.  The buyer would then apply for his/her mortgage with a renovation loan specialist (me).  The interest rate is slightly higher than a regular FHA loan, a contingency reserve for potential cost over-runs is added and there are some other minor fees associated with the renovation aspect of the loan.

Purchase price:                                 $100,000

Renovation:                                       $25,000
Contingency reserve & fees:      $2,980
Total acquisition cost:                   $127,980

The borrower's required down payment of 3.5% of the acquisition cost equals $4,480.  Assuming he/she negotiates with the seller to pay all or most of the closing costs, he/she won’t need much more money than that. 

At closing, the seller receives their proceeds, ½ of the renovation is funded to the buyer and contractor jointly, and the renovation begins within 30 days of closing.  The project must be completed within 6 months (generally done much sooner) and the final disbursement is made after a final inspection, title update, and loan review are complete. 

These loans are for owner occupied borrowers with the expectation that the home will remain occupied by the owner for at least one year. FHA may be rolling out an option for investors in the near future. 

Simple, right? 

Call your Allen Tate Realtor and Mortgage Consultant for additional information and assistance!

Eligible Repairs
•       Repair/replacement of roofs, gutter and downspouts
•       Repair/replacement/upgrade of existing HVAC systems
•       Repair/replacement/upgrade of plumbing and electrical systems
•       Repair/replace flooring
•       Painting both interior and exterior
•       Weatherization, including storm windows and doors, insulation, weather stripping, etc.
•       Purchase and installation of appliances, including free-standing ranges, refrigerators, washer/dryers, dishwashers and microwave ovens ($3k max)
•       Accessibility improvement for persons with disabilities
•       Lead based paint stabilization or abatement of lead based paint hazards
•       Repair/replace/add exterior decks, patios, porches
•       Basement finishing and remodeling, which does not involve structural repairs
•       Basement waterproofing
•       Window and door replacements and exterior wall re-siding
•       Septic system and/or well repair or replacement
•       Minor remodeling, such as kitchens, which does not involve structural repairs

Simple steps to a successful renovation loan

1.  Get pre-qualified and consider a full pre-approval.  This statement is true for any type of loan.  If you are a well qualified buyer, a pre-qualification is sufficient from the right loan officer.  But if you have a couple issues that require review from an underwriter (loan decision maker),  get fully pre-approved.  The difference is that with a pre-approval you supply your supporting documentation (W2's, pay stubs, etc.) and sign an application disclosure package.  The result is a loan commitment and much stronger negotiating power with sellers.

2.  Get organized.  Once you find the right house and negotiate the contract the real work begins.  For most buyers, you'll need to turn your pre-qualification into a loan approval/commitment and lock your rate.  At the same time, you will need to begin working with your general contractor(s) to specify the scope of work and cost of renovations.  These need to be nailed down prior to ordering the appraisal so we can determine the "after improved" value.

3.  Give plenty of time.  Try to negotiate a 60 day contract to close period to give yourself and us the time needed to coordinate the financing and renovation.  We may be able to close faster but there are many variables at play and you don't need the extra stress of a quick closing.

4.  Be decisive.  If you have trouble picking the toppings to put on your pizza, this may not be the right loan program for you.  Identify what you want to renovate and make it happen.

5.  Consider hiring a HUD consultant.  Usually HUD consultants are used for larger renovations and ones that include structural items.  However if you could use help identifying the scope of work and working with contractors, a HUD consultant may be right for you.

Most importantly, work with a real estate and mortgage company that is committed to your success now and in the future:  The Allen Tate Company.

Call or email me if you are interested in learning more about our renovation lending program. 

Financing a Distressed Sale

Depending on which news story you read on which day, somewhere around 30 percent of today's sales are classified as distressed.  A distressed sale is a foreclosure or short sale and often in some form of disrepair.  As a buyer you may be able to buy the property at a substantial discount to other sales in the neighborhood.

But how do you finance the fix-up on your fixer-upper?

Consider an FHA 203k loan. This renovation/rehab loan program combines a traditional home mortgage with a home repair loan, giving you the flexibility to buy a property that needs repair and fold the cost of those repairs into a single mortgage.

With a Streamline 203(k) loan, you can borrow up to $35,000 for improvements such as repair/replacement of roofs, flooring, siding and windows; electrical, plumbing, painting, weatherization, basement finishing and appliances. You can even use the money to improve energy efficiency or to make a home accessible for a disabled person.

Work must begin within 30 days of closing and be completed within six months. Funds are placed in escrow and contractors are paid as the work is completed.

To get the most from your 203(k), it’s important to find the right property as well as a Realtor who knows and understands the program. At Allen Tate Mortgage, we’ll help you navigate the renovation loan process and turn that fixer-upper into your dream home.