mortgage

FHA offers home renovation help

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 Section 203(k) loan allows borrowers to wrap the cost of repairs and improvements into a single mortgage.

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"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 $35,000 or less.

The second type of 203(k) loan applies to improvements costing more than $35,000.

A 203(k) loan requires a minimum of $5,000 to be spent on rehabilitation of the home. Generally, the maximum mortgage amount depends on the lesser of the borrower's approval limit, the FHA maximum mortgage limit for the area or 110 percent of the appraised value of the improved property.

Loan restrictions

While 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, work has to begin within 30 days of closing and be complete within six months. The borrower is allowed to be the contractor if qualified, but cannot be paid for anything outside the cost of materials and must meet specific FHA qualifications.

If a contractor is being used, be sure to ask if they have done 203(k) programs before, says Mike Tompkins, a mortgage consultant with W.J. Bradley Mortgage Capital in Scottsdale, Ariz. "The contractor needs to understand the payment schedule and requirements."

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