How to Get the Best Mortgage Series – Week 7

Buy AND Renovate with One 203(k) Loan

The kitchen is dated. The bathrooms need work. The flooring has seen better days. Maybe it doesn’t have the open floor plan you want—but it has the location, yard, school district or other features you’ve been looking for.

Before you cross it off your list, there’s a financing option you should know about.

An FHA 203(k) loan allows qualified buyers to purchase a home and finance eligible renovations through one mortgage. In some situations, homeowners may also be able to use a 203(k) to refinance and renovate their existing home.

That means a house that isn’t perfect today could potentially become the home you want after renovations.

What Is an FHA 203(k) Loan?

Instead of purchasing a home with one loan and then figuring out separately how to pay for renovations, an FHA 203(k) combines the purchase and eligible renovation expenses into one mortgage.

Like other FHA financing, the minimum down payment may be as low as 3.5% for borrowers who meet applicable FHA requirements.

The renovation funds aren’t simply handed to you at closing. They’re generally held in an escrow account and released as approved work is completed.

There are two versions of the program: Limited 203(k) and Standard 203(k).

Limited 203(k)

The Limited 203(k) is designed for smaller renovation projects and currently allows up to $75,000 in eligible rehabilitation costs.

It can be useful for improvements such as updating a kitchen or bathroom, replacing flooring or windows, making certain roofing or mechanical repairs, or completing other eligible non-structural improvements.

Standard 203(k)

The Standard 203(k) is intended for larger projects and can include structural renovations. It generally requires at least $5,000 in rehabilitation costs and involves a HUD-approved 203(k) consultant as part of the process.

Which program makes sense depends on the property and the work you want to complete.

What Can You Renovate?

One thing buyers are often surprised to learn is just how many improvements may qualify.

Depending on the program and property, eligible improvements can potentially include:

• Kitchen and bathroom renovations
• Roofing
• Flooring
• Windows and doors
• Heating and cooling systems
• Plumbing and electrical improvements
• Certain exterior improvements
• Energy-efficiency upgrades
• Repairs involving health or safety concerns
• Structural alterations and additions under the Standard program

Any repairs required for the property to meet applicable FHA standards will also need to be addressed.

Not every project or improvement qualifies, which is why working with a lender who understands 203(k) financing is so important.

How Does the Process Work?

A 203(k) purchase takes more planning than buying a move-in-ready home, but the basic process doesn’t have to be overwhelming.

1. Talk with an experienced 203(k) lender.

Before you seriously shop for a fixer-upper, find out whether this financing makes sense for you and how much you may qualify to borrow.

Your credit profile can also affect the mortgage programs, interest rates and terms available to you. If you’re preparing to purchase a home, you may also want to read How Your Credit Score Can Impact Your Loan Options.

2. Find the property and determine what it needs.

Once you find a home, your real estate agent and lender can help you determine the next steps and whether the property and proposed renovations may work with the program.

You’ll also need estimates for the work you plan to complete.

3. The home is appraised with the improvements in mind.

The FHA appraisal considers the property and proposed renovations, including its expected value after the improvements are completed.

4. Close and renovate.

After closing, renovation funds are generally held in escrow and released as approved work is completed.

Current FHA guidelines allow rehabilitation periods of up to nine months for Limited 203(k) projects and 12 months for Standard 203(k) projects, subject to applicable FHA and lender requirements.

Don’t Automatically Rule Out the Fixer-Upper

An FHA 203(k) loan isn’t the right fit for every buyer or every property. It requires more planning, paperwork and coordination than a traditional purchase.

But knowing the option exists can change the way you look at homes.

That house with the dated kitchen, ugly flooring or repairs you’ve been worried about might deserve a second look—especially if it has the location and other features you can’t easily change.

Sometimes you don’t have to find a home where someone else has already completed every improvement.

The right financing may give you the opportunity to make it your own.

Wondering If a 203(k) Could Work for You?

If you’re considering a home that needs work and want to explore your financing options, reach out to me. I can help you look at the bigger picture and connect you with a trusted mortgage professional who is familiar with renovation financing.

Buying outside of Pennsylvania? You can still reach out. I can connect you with a trusted real estate professional in your area through my nationwide agent network.

Loan programs, limits and requirements can change. Always consult with a licensed mortgage professional for current program guidelines and advice specific to your financial situation.