Homebuyers who buy an older home or foreclosure often are frustrated by the difficulty of financing needed repairs and renovations. But a Federal Housing Administration home loan program offers some help.
A 203(k) Rehabilitation Mortgage Insurance Program loan allows borrowers to wrap the cost of repairs and improvements into their home financing."We've seen tremendous growth in the use of these loans across the country, especially in areas where the housing stock is old and needs repairs or when people are buying foreclosures and short sales," says Stephen Adamo, president of Weichert Financial Services in Morris Plains, N.J.
The 203(k) loan is a boon for cash-strapped homeowners who either cannot or do not want to tap their home equity. It also offers an alternative to borrowers struggling to find other sources of financing.
"This is a great loan product because it can be very hard to find a construction or rehabilitation loan these days," Adamo says.
There are two types of 203(k) loans. The first, and more common, loan is known as a Streamline 203(k) and is restricted to repairs or improvements that total $30,000 or less, according to Neil Fernandez, a senior loan officer and 203(k) specialist with Prospect Mortgage in Ashburn, Va.
"FHA says that these loans can go up to $35,000, but lenders usually won't go above $30,000 because we need to factor in the costs of the loan," Fernandez says.
The second type of 203(k) loan applies to improvements costing above $30,000.
A 203(k) loan requires a minimum of $5,000 to be spent on rehabilitation of the home. The total mortgage amount, including all repair costs, must fall within the FHA mortgage limit for the homeowner's area. These limits vary across the country and range from $271,050 to $729,750.
Loan restrictionsWhile 203(k) loans may be a great option for many homeowners, they also come with some restrictions.
For example, 203(k) loans can be used for refinancing as well as purchase loans, but are limited to owner/occupants. Investors are not eligible.
In addition, a licensed contractor must be used for the work, which has to begin within 30 days of closing and be complete within six months.
"Contractors have to meet specific FHA qualifications, so homebuyers and owners should ask a potential contractor if they have done 203(k) programs before," says Mike Tompkins, a mortgage consultant with WJ Bradley Mortgage Capital in Scottsdale, Ariz. "The contractor needs to understand the payment schedule and requirements."