Today I will be discussing a great new FHA mortgage that can be used to purchase and fix up homes. This loan is called the FHA section 203K mortgage.
OVERVIEW OF FHA 203K MORTGAGES
In today's real estate market, we face a challenge because there are a lot of homes for sale that are in need of being fixed up in order to for them to be habitable. Many of these properties can be purchased for a great price, but after the homeowner purchases the home, they either have to have the cash to fix up the properties or they have to take out construction loans to fix up the home. These loans a lot of the time have interest rates that are a good bit higher than a typical 30 or 15 year fixed rate mortgage. Also, a lot of construction loans have balloon payments where the person who takes out the loan has to make a very big payment to pay back the majority of the loan at one time. Because of this situation, many of these "fixer upper" homes, which a lot of the time are bank owned properties, are never purchased and just sit on the market.
The new FHA 203k mortgage helps people who would like to purchase a home for a great price and fix it up. The mortgage amount includes the purchase price of the home plus the amount of money that it will cost to fix up the home. This is great because this means that the homeowner does not have to deplete his or her cash or obtain expensive construction loans to fix up their home. The cost of fixing up the home is amortized into the monthly mortgage payments at an interest rate just a little bit above a normal FHA mortgage loan. The new FHA 203K mortgages can also be used to refinance a home as well.
HOW IT WORKS.
The way that the new FHA 203K works is as follows. First, you locate the property that you want to purchase, and you write an offer on the property for a price that you think is fair. Once you have an executed purchase contract, you submit the contract along with estimates of how much it will cost to fix up the home to your FHA approved lender. There has to be at least $5,000 worth of repairs in order for a person to qualify for this loan. Once you close on the home, part of the loan proceeds go to pay off the person selling the house, and the other part of the loan proceeds go into an escrow account where it is held to pay for the repairs needed to be done to the home. The new homeowner draws the money out of the escrow account as he or she makes repairs to the home. You do not have to take the money out of the escrow account all at once at the end of the completion of all of the repairs. You are allowed to make repairs in steps and take money out of the escrow account as you go. You do have to have cash to make the initial repairs, and when you draw money out of the escrow account, you are being reimbursed for those repairs.
WHAT TYPE OF REPAIRS ARE ALLOWED
The types of repairs that are allowable under the FHA 203 K mortgages are pretty broad. The amount of repairs to be done has to be at least $5,000. The types of repairs that are allowed to be financed with the FHA 203k loan include the following.
- Structural alterations and new construction
- Repairs done to eliminate health and safety hazards
- Changes made for aesthetic appeal
- Installation or replacement of air conditioning system and repairs made to air conditioning system
- Installation of well, septic system, or cost to connect home to public utilities
- Roofing, gutter downsprouts, flooring, tiling and carpeting
- major landscape or site improvements
- improvements made for accessibility and functions for disabled.
- Making energy conservation improvements.
What type of properties are eligible for FHA 203K
Not all properties are eligible for the FHA 203K Loans. Residential properties that have 1-4 units are allowed. This would include detached single family homes, townhouses, condos and the residential portion of mixed use property. You are also allowed to purchase a home and purchase a seperate piece of land and move the home to the new piece of land. The purchase of demolished homes are also allowed as long as some of the existing foundation systems remain in place. Coopertive units are not allowed to be financed under this program.
Condos are allowed to be financed only under certain condtions.
- First off, only the inside of condos are allowed to be rehabilitated. The condo association that the condo is a part of is responsible for maintaining and fixing the exterior of the condo.
- The person purchasing the condo must be the owner occupant or a qualified non-profit borrower. No investors purchasing condos are eligible.
- Each building in the condo project must contain no more than four condos per building
- The condo project must be approved by HUD by no later than closing.
- Only the lesser of 5 units per association or 25% of the total units, can be undergoing rehabilitation at one time.
- The maximum mortgage amount cannot exceed 100% of the after improved value of the condo.
How do I qualify for the FHA 203K Mortgage.
Qualifying for the FHA 203k Mortgage is pretty much the same as qualifying for a regular FHA insured loan as long as the property and the type of repairs to be completed are permissable as mentioned above. The FHA approved lender is going to look at credit score, income, expenses and assets of the borrower in order to approve the borrower for the loan.
How do I get started.
- Select and have a meeting with an FHA approved lender
- Locate a property that you would like to puchase
- Find out what needs to be repaired in the home and get an estimate of the repairs that need to be done
- Find out what the expected market value of the home will be once the work is completed. You can do this with the help of your REALTOR, or you can have an appraisal done by a property appraiser.