All 203(k) applicants need to get three bids from contractors and must have an evaluation by a HUD-approved cost consultant. Such consultants can be found through a lender or via the FHA Web site, says Jeff Cook, a senior loan officer with Skyline Financial Corp., in Los Angeles.
"An appraisal will be done on the 'as-is' value of the home plus the improved value once the repairs are complete," Cook says.
Fernandez says borrowers are allowed to do some of their own work -- such as painting -- if it does not require a license or certification. Even then, they must provide a written statement that they have the time and materials needed to take on the task. Borrowers with a license or certification in fields such as electrical or plumbing work must present the certification for HUD approval.
Certain types of projects may be ineligible for 203(k) financing, says John Thomas, a Certified Mortgage Planner with Primary Residential Mortgage, Inc. in New Castle, Del.
"No major structural repairs can be undertaken with a Streamline 203(k) such as putting on a new addition or fixing a cracked foundation," Thomas says. "But you can repair the roof, do plumbing repairs and even add an attached garage."
Full 203(k) loans allow almost any home improvement as long as it adds value to the home. Such projects include structural additions, finishing a basement or remodeling a kitchen.
"Luxury items such as a swimming pool or a hot tub cannot be financed with a 203(k) loan," Fernandez says. "But high-end materials like granite counters, stainless steel appliances and hardwood flooring are allowed."
Qualifying for a 203(k)To qualify for a 203(k) loan, you'll need decent credit. Most lenders require a credit score of 620 and above for an FHA loan, says Cook.
Like all FHA loans, 203(k) loans require a 3.5 percent down payment (based on the total loan amount, including the purchase and renovation costs) and an upfront mortgage insurance payment of 1.75 percent of the total loan amount. This can be wrapped into the financing.
Borrowers also pay a monthly mortgage insurance premium of approximately 0.5 percent of the loan, based on the loan-to-value and length of the mortgage.
"Interest rates on 203(k) loans are slightly higher than other FHA loans (about 0.2 percent to 0.5 percent higher) because there's a greater risk for the lender until the work is actually completed on the property," Thomas says.
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