SANTA ANA, CA--(Marketwire - Mar 20, 2013) - With the housing market showing signs of growth and expansion it's surely the right time to look at the FHA 203k mortgage program, financing that allows borrowers to finance and fix up a home with a single loan.
"Most people want the easiest possible mortgage financing," said Ray Brousseau, Executive Vice President with Carrington Mortgage Services, a lender active in more than 40 states. "Instead of one loan to buy or refinance a property and a second mortgage for improvements, with 203k financing there's just one loan and the monthly payment that includes both."
So one loan, two loans, what's the big deal?
In a word: money.
"The 203k program is set up so there's a single loan application and a single closing," says Brousseau. "Borrowers are not stuck with a second set of closing costs that can often total thousands of dollars. And because the 203k program is FHA-insured, qualified borrowers can get 30-year financing with just 3.5 percent down."
Here's how it works:
The Down Payment: Since this is an FHA-insured mortgage, the down payment can be as little as 3.5 percent of the loan amount.
Generally FHA down payments must come from the borrower's own funds. However, as Brousseau explains, gifts are allowed. Gifts can come from such sources as relatives, friends and employers and can represent some or all of the down payment.
Brousseau also noted that the cash needed for closing can often be further reduced because some expenses can be added to the loan amount and paid out over time. In addition, a buyer may be able to negotiate a "seller contribution" with an owner to offset closing costs. The range varies, but usually hits a maximum of 6 percent of the loan amount.
Loan Amount: The maximum 203k funding available for a borrower depends on such factors as the state and community where the property is located, the number of units (one to four) and the borrower's financial qualifications.
Can the 203k program be used with distressed properties? Yes. The 203k program can be ideal for short sales, foreclosures, REOs and distressed sales where properties can be bought at a discount but require repairs and improvements for habitability reasons or simply to increase market values.
"The FHA 203k loan can also help in areas hard-hit by hurricanes, tornadoes, earthquakes and floods," said Brousseau. "For instance, the usual 203k rule that a property must be at least a year old does not apply in a federal disaster area."
Is all the cash paid out up front? With a 203k loan there are two forms of payment. First, at closing there's a lump sum to purchase the property or refinance an existing loan. Second, the remaining money is held in an escrow account and paid out in "draws" as repair work is completed.
What's the role of the 203k consultant? HUD-approved consultants who work with most full 203k loan program borrowers determine the scope of work required and assure that all repairs meet current standards. On Streamline 203k loans, a consultant is not required.
"The use of the 203k consultant is an important borrower protection," said Brousseau. "The consultants must be HUD-approved and have backgrounds in such fields as construction, home inspections, engineering and architecture. They check that the work is properly done before final payments are made."
What happens if a property requires extensive renovation and cannot be immediately occupied? Since it may not be possible to occupy the property during the construction period, up to six monthly mortgage payments can be included in the loan as a cost of rehabilitation (this is allowed only with the full 203k loan program).
What types of repairs are allowed? Most repairs associated with an owner-occupied property are allowed -- but not all. As HUD explains, "Luxury items and improvements are not eligible as a cost of rehabilitation. However, the homeowner can use the 203k program to finance such items as appliances, painting, room additions (on the full 203k loan), decks and other items even if the home does not need any other improvements."
Can I use 203k financing to fix up a condo unit? Yes, however repairs are limited to the inside of the unit and only five units in a given project at any one time can qualify for the 203k program. Borrowers should check with lenders on the types of repairs that are allowed by property type.
What if I want to make improvements but the cost is less than $35,000. The full 203k program requires repairs worth at least $5,000. However, with the Streamline version of the 203k program there is no minimum repair requirement (while the maximum amount available for fixing up is $35,000). These minimums may vary by lender; inquire with a lender representative for the details.
"With the Streamlined 203k the borrower can make a wide range of improvements," said Brousseau. "They can use 203k money to repair or replace roofs, gutters, downspouts, heating systems, air conditioning systems, flooring, paint and decks. There's a wide range of improvements that can change the image of a property from distressed to distinguished."
For additional 203k information, speak with the Carrington loan professional in your community.
Overview of Key Differences Between Full 203k and Streamline 203k Loans*:
|Full 203k||Streamline 203k|
|Allowed renovations and repairs||Major structural repairs/renovations including room additions||Minor projects that require less time and fewer contractors|
|HUD-approved consultant required||Yes||No|
|Maximum/minimum rehabilitation cost requirements||No maximum; minimum requirement is $5,000||No minimum; maximum allowed is $35,000|
*203k loan information provided by Carrington Mortgage Services, LLC. Guidelines may vary by lender.