Is An FHA 203K Loan Right For You?

Alternative financing options…

When you spot a potential investment property being sold below market value, but in need of a great deal of renovation work, always consider a couple of possible financing options available to you. These particular type of mortgage loans will help drastically increase your ability to leverage any given property. If you’re planning on living in at least one of the units of the building, then consider utilizing an FHA 203K loan for your mortgage needs. With the 203K, you can choose from a couple of options, either the regular version or the streamlined version. With either one, you’ll be rolling the costs of the renovation work into the entire mortgage. However, the main caveat with an FHA 203K renovation loan is that you must be an owner-occupier of the property. All other property investors will not qualify for this style of mortgage loan.

Choosing the right lender

If you use the services of a local, trusted mortgage broker, they will recommend banks that offer the FHA 203K style loan. (Not all banks participate in offering this particular lending product.) The Federal Housing Authority allows participating lenders to offer this option. The main difference between the regular FHA 203K and the streamlined versions has to do with the amounts being borrowed for the renovations. Generally, smaller projects (with rehab work under thirty-five thousand dollars) qualify for the streamlined version. And conversely, larger projects naturally qualify for the regular version. With the streamlined type of 203k mortgage, the paperwork and process tend to be shorter and faster. And with the regular version, things will take linger, and are more involved with the paperwork. This tends to be the main drawback of the regular 203K loan – the time to close can be quite long due to the paperwork and bureaucratic red tape involved in closing on the loan. Expect a typical loan to close within sixty to one hundred twenty days from application, or about twice as long as a conventional loan.

Using FHA 203K

If the investment property that you will be making your primary residence needs major repairs, you may be able to handle the purchase transaction and also secure the necessary fix-up monies using one single loan using the 203(K) FHA rehab loan. In many situations where conventional financing is hard to come by (or doesn’t even exist in your area) to finance the renovation work for your primary residence, applying through an approved FHA lender for 203(K) financing can work as the optimal solution to your financing problem.

The FHA (Federal Housing Administration) is the HUD’s (Department of Housing and Urban Development) division that administers various single-family mortgage insurance programs through approved lenders. These programs help offer aid to buyers of residential properties. It is very important to note that the FHA does not directly get involved in the underwriting, processing or actual funding of the residential mortgages it insures. It is only these FHA approved lenders handle that will control aspects of the loan origination process. This all came about when, in 1978, section 203(K) of the National Housing Act was amended (by the Section 10(c) (1) of the Housing and Community Development Amendments). The main reason for this action was to allow HUD to be able to help promulgate the restoration, rehab and preservation of existing housing stock in the U.S.

Some basics about FHA 203K mortgages

The FHA 203k loan is a type of FHA-insured product which lets homeowners finance the cost of repair work to renovate their primary residence into their overall home mortgage. Most of the qualifying criteria are similar to regular FHA loans. However, the way it is administered and the procedure involved is wholly unique to the FHA loan application process. These loan requirements are created by the Department of Housing and Urban Development (HUD). A homeowner/investor can use the 203k loan program would use the program to pay the outlays needed for improvements to their primary dwelling. The paper involved includes essential cost estimates based on written bids from a 203k-approved contractor and appraiser. With these estimates, a lender can then determine the total 203k mortgage amount the lender will be willing to lend the applicant. Renovations that include energy efficient improvements, structural changes and kitchen appliances are just some of the improvements eligible for 203k mortgage loan financing.

Choosing the type of 203K program

With FHA 203K products, as mentioned above, there are two types of renovation programs that fall within their guidelines. The type of loan depends on the type of work and the total cost for each of them. Keep in mind that both sets of loans can be used for either purchase or refinance deals. With the standard program, only properties that need drastic improvements are considered. Major additions and structural changes would come in under this mortgage type. A standard 203k loan program allows a loan amount that is 110% of the after-improved value. This of course would be determined by the use of an FHA-approved appraisal. An FHA 203K – approved contractor is required to perform the building inspection in order to do the complete work write-up and estimates. A minimum of $5,000 must be borrowed for the renovation work. And the maximum loan amount will be dependent upon the proposed appraised value. Meanwhile, all other qualifying guidelines are going to be similar, and in line with, other FHA type loans.

Using the streamline style program

The FHA 203K streamline mortgage is mainly utilized for rehab work costing less than the aforementioned thirty-five thousand dollars in total improvement costs. Items like basic cosmetic improvements (for example, interior and exterior painting), as well as simple non-structural repair work, can be financed with this type of streamline mortgage loan. However, there is a minimum loan amount requirement. The whole 203K streamline guidelines were created to help make the approval process go smoother and faster. The 203K standard program is thus meant for projects that need major renovation work, whilst the 203K streamline type of mortgage loan is primarily used for simple cosmetic repairs that fall below the thirty-five thousand dollar threshold.

What about non-primary home investment?

If you’re not going to be living in your investment property while renting out one or more other units in the building, then consider a different style of renovation financing. There exists a unique wraparound loan that has been around for a few years now. It came about as an outgrowth of the 2008 financial crisis. I have written in a prior article here about this type of product, noting that “for many years now investors have had only one choice when it comes to investment property loans that allowed for renovation cost wraparound financing. These types of loans are used so you can incorporate the fix up costs to renovate the property into the total mortgage for the house. This type of loan is called the FHA 203K renovation loan. The problem in the past with this form of loan is that you had to occupy at least one of the units in the building you were purchasing.”

The Homestyle Renovation mortgage

I went on to say that “for most investors, if you were not going to live in the investment property, this type of loan would not be available to you. In addition even if you were purchasing a multi-family house under five units, and if you were not going to live there, this type of loan would not be for you. It would only work if you’re going to live in one of the units.” I then mentioned how Fannie Mae created the Homestyle Renovation loan. It came into existence as the federal government attempted to help banks lessen their inventory of foreclosed properties. I noted that “as an investor, you can purchase a property and wrap the renovation costs in with the total mortgage. And you don’t have to live there.”

Why buy with all cash?

The name of the game is leverage. It is through leverage that you will be able to grow your rela estate holdings in the future. And the Homestyle Renovation mortgage allows you to greatly increase your leverage on any given property that requires a good deal of repair work. Instead of utilizing your own cash reserves, better to use a lender’s – if they are willing to supply it, that is. I have previously noted how this concept “frees up your other capital for purchasing other properties. This Fannie Mae Homestyle Renovation loan can be used to purchase basically any house, condo or townhome, or multifamily property. And the property can be in any condition, and loans will typically carry loan to value ratios in the 50 to 75% range, depending on the property.”

Some advantages of using the Homestyle Renovation loan

One of the major advantages of the Homestyle loan compared with the FHA 203K is that Homestyle is a conventional Fannie Mae mortgage loan. In most places that means the loan limits in most places are $417,000. Besides allowing for higher loan limit amounts, the Homestyle program (as noted above), is available for property investors. Naturally, FHA mortgages are intended only for owner-occupants, and to be used as a primary residence. Another key advantage of the Homestyle product is the mortgage insurance premium savings. FHA loans have private mortgage insurance (PMI) associated with them, regardless of the amount you put down. Even if you do put 20% down on the property, you still have mortgage insurance on a FHA 203K. Unless your refinance, that insurance will continue to be paid – for at least a minimum of five years. However, with Homestyle, just as with other conventional loans, the mortgage insurance will get reduced over time, and will go bye-bye once you reach the twenty percent down level. Your overall savings will be substantial the longer you hold your property.

Other advantages of the Homestyle loan…

In addition, the Homestyle loan has no restrictions on the type of work performed on the investment property. So, for example, if you feel you can add tremendous value to the property by adding a pool, since the location can take the added value a pool confers (assuming there are many similar properties with pools already there on the same block), you can use the Homestyle to finance this type of improvement. Not so with FHA 203K loans, which do not allow “luxury” items to be financed. For all these reasons, the Homestyle type of loan offers many more advantages than the FHA 203K mortgage program.

 

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