May 4th, 2019 8:05 AM by Jackie A. Graves, President
next home and getting a mortgage for the fixer-upper can be easily accomplished
in the same transaction with a Federal Housing Administration home loan.
FHA home loan program offers a mortgage which combines both goals, the FHA-insured
Section 203(k) loan. If living in a home while it is undergoing a makeover
sounds appealing, then this loan could be the right fit for you.
Benefits for homebuyers
who are taking advantage of cheaper sales prices from short sales and
foreclosures often focus on older properties that need to be remodeled or
updated extensively. Obtaining one loan for the purchase and the renovation can
be cheaper and it ensures that you have money for the repairs.
“This can be
used when buying a home that is in need of major repairs before it can become
inhabitable, and will save time and money because you get one loan that covers
both the purchase price and the costs of the ongoing repairs,” says Greg
McBride, CFA, chief financial analyst for Bankrate.
There is one
catch – the total amount borrowed must still be within FHA loan limits for the
area where the home is located, he says.
A 203(k) FHA
loan is a good fit for older homes, but not ones that are fairly new since a
minimum of $5,000 must be spent for renovations.
“This can be
beneficial for those who anticipate the need for making costly repairs but want
to avoid taking on additional home equity loans,” says Bruce McClary,
spokesperson for the National Foundation for Credit Counseling, a Washington,
D.C.-based non-profit organization.
The 203(k) loan
also offers solid refinance rates for cash-strapped
homeowners who either cannot or do not want to tap their home equity.
The FHA offers
two kinds of 203 (k) loans.
Either type of
203(k) loan requires a minimum of $5,000 to be spent on rehabilitation of the
maximum amount you can borrow for the mortgage is the lowest of the following:
You must apply
for a Section 203(k) mortgage through an FHA-approved
loans can be used for refinancing as well as purchase loans, the main
restriction is that the person seeking the mortgage has to be the owner or
occupant. Investors are not eligible for this FHA loan.
The work must
begin within 30 days of closing and be completed within six months.
isn’t for everyone and there are some important restrictions,” McClary says.
“Repairs will need to be completed in six months and the loan is not for
investors. It’s a good idea to consider different types of financing if you are
anticipating minor repairs since a 203(k) is better suited for major projects
that are necessary to transform neglected properties into more habitable living
should be familiar with the program, especially the payment schedule and
renovations are completed, the mortgage borrower is required to provide a
letter and a HUD-approved cost consultant conducts an evaluation. Consultants
can be found through a lender or via the FHA website.
The FHA program
limits the projects to structural alterations and reconstruction and
modernization and improvements to the home’s function. Homeowners can replace
plumbing, add or replace a roof or floors, finish a basement, remodel a kitchen
or make energy conservation improvements.
projects that do not qualify for 203(k) financing including luxury items such
as a swimming pool or a hot tub.
FHA loans were
created to allow people to buy a home with a smaller down payment. The minimum
amount for a down payment is 3.5 percent of the total loan amount that includes
both the cost of the house and renovations.
A credit score
of at least 580 is needed to be approved for the loan. Keep in mind that many
lenders require a score of 620 or higher. Shop around and compare rates.
require an upfront mortgage insurance payment of 1.75 percent of the total loan
amount, which can be wrapped into the financing.
pay a monthly mortgage insurance premium based on the loan-to-value
length of the mortgage.
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