As a REALTOR ®, I continue to run into these two types of buyers time and time again…
- The first type of buyer is hunting for a bargain in a Phoenix home market that is currently inundated with foreclosures, short-sales and bank-owned homes. And generally, these properties are not “turn-key” or in “move-in” condition. In fact, many are deemed inhabitable by FHA standards because they’re missing floor coverings, appliances or have major/minor issues such as leaky roofs or inoperable heating and cooling systems. If FHA won’t insure the loan then the buyer is forced to continue the search. The investors with cash and the conventional buyers continue to be the only ones in the market that can qualify for these diamonds in the rough.
- The second type walks into their dream home over and over again but has a problem seeing past the horrible paint, the funky smell, the stained carpets, the ugly mismatched tile, the missing appliances, etc. Yet the bones of the home are intact, the price is right, the floor plan and location are perfect, it has the pool, the yard, etc. Many of these homes would work perfectly but because the buyer has limited funds, they wouldn’t be able to make the necessary updates or repairs until they could save the money long AFTER they’ve moved in.
The common thread with both of these types of buyers is FHA is their only financing option. And the majority of FHA buyers out there have limited funds. So are there any options for the FHA buyer in these situations? Absolutely! Check out these Rehabilitation Mortgage programs…
FHA 203K Streamlined Loan- How can it be used?
This program can be used to accomplish rehabilitation and/or improvement of an existing one-to-four unit dwelling in one of three ways:
- To purchase a home and the land on which it is located and rehab/ remodel it
- To purchase a home on another site, move it onto a new foundation on the mortgaged property and rehabilitate it
- To refinance existing mortgage indebtedness and rehabilitate a home
What improvements are eligible under the new Streamlined (k) program?
The Streamlined (k) program is intended to carry out a simple rehabilitation and/or improvements to a home for which plans, consultants, engineers and/or architects are not required. The Streamlined (k) program includes the discretionary improvements and/or repairs shown below:
Eligible Improvements:
- Roofs, gutters, and downspouts
- Upgrade or Replace existing heating, ventilation, and air conditioning systems
- Upgrade or Replace Plumbing and Electrical systems
- Flooring (non structural, repair or replacement)
- Painting -Interior/Exterior
- Lead-based paint stabilization or abatement of lead-based paint hazards
- Minor remodeling that does not involve structural repairs such as bathrooms and kitchens
- New Appliances (Range and/or Oven, Range hood, Microwave, Trash Compactor and Washer/Dryer -built in or Free Standing)
- Improvements for accessibility for persons with disabilities -remodeling kitchens and baths for wheelchair access, lowering kitchen cabinets, or installing wider doors (non load bearing walls only) and exterior ramps
- Energy Efficient Improvements
Appliances
Windows and Doors
Weatherization (weather stripping, etc) up to $2,000 over the 203k
- Exterior decks, patios, porches and fences
- Basement finishing and remodeling that does not involve structural repairs including waterproofing
- Replacement of windows and doors and exterior wall re-siding
- Mold Abatement or Termite Active Infestation repairs (tenting, etc)
- Connection to Public Water or Sewer
- Repair or replacement of septic tank
What items remain ineligible for the 203K Streamlined program?
- Major rehabilitation or remodeling such as the relocation of load bearing walls
- New construction (including room additions)
- Landscaping or similar site amenity improvements
- Any repair or improvement that will require more than 6 months to complete or will displace the borrower for more than 30 days.
- Work that will not begin within 30 days of closing
- Rehab activities that will require more than 2 draws
- Rehabilitation activities that require more than two (2) payments per specialized contractor
- Repairs that require detailed drawings or architectural exhibits (i.e.: Major additions, structural additions)
FHA 203K Loan- Simple Overview:
- 203k Streamlined FHA loans allow you to finance the cost of repairs into your new loan amount. The loan cannot exceed 110% of the “after improved value” which is determined by the appraiser.
- The maximum amount allowed for repairs and improvements is $35,000. Additional funds are available under the Energy Effeciency Loan program – discussed in another blog.
- The Down payment is 3.5% of the purchase price plus the final cost of repairs which will most likely include loan fees and contingencies required by the lender. Closing costs are of course separate from this down payment amount.
- Buyer will need to obtain estimates from several LICENSED contractors for the work to be completed depending on how extensive the repairs. I would recommend obtaining at least two bids for each job.
- The buyer can act as their own general contractor only if experienced and licensed. (FHA says experienced, but most investors require the buyer to be licensed). In addition, contractors must provide documentation to be approved by the lender prior to approval.
The loan process:
- Borrower locates property and enters into a contract to purchase
- Borrower selects contractors
- Contractors prepare bids
- Appraiser appraises property with bids in hand
- Loan closes and 50% of the total draws are issued
- Rehabilitation begins within 30 days of close
- Borrower has 6 months to make all repairs/ renovations
- Repairs/ renovations are completed and property is inspected by loan servicer
- Compliance Inspection Report is issued from the loan servicer
- Final draw is released to borrower and/or contractors
Special Notes:
- I highly recommend you give yourself and your lender at least 45 to 60 days from the time you’re officially under contract to the day you close. As you can see from the high-level process, there is a lot more to be done so you need to allow yourself, your contractors and your lender enough time to get all of the bids and supporting documentation together.
- Some lenders will allow you to include the monthly payments in your 203K total. For many rehab projects, it’s understood that the borrower will be living in a different residence while the repairs and remodeling is being carried out. Therefore, some lenders will allow the borrower to include a set number of monthly payments into the 203K budget.
- Be careful to not “over improve” the property as it needs to appraise for the total loan amount!
- Make sure your lender knows what they’re doing- this is absolutely crucial. Many lenders claim to know the ins and outs of the 203k process- make sure this is true!
- Make sure you know what YOU ARE doing as well. The lenders I work with do not provide contractors so most clients already have contractors lined up before they even begin looking for a home. Once you pull the trigger and have a home under contract, you have to move fast in getting your bids together.
- Although competitive bids are not required, if a bid(s) seems too high to the lender they can require you to obtain additional bid(s).
We’d love to hear your questions or if you would like more information on buying a home with an FHA 203k and Streamline rehabilitation loan leave a comment below or get in touch with us at 480-820-0043.