FHA loan helps with home renovations

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While buying a foreclosed property may be a great deal, the rock-bottom price is typically offset by costly repairs needed for a neglected home. If you are having trouble getting financing to cover your mortgage plus the cost of repairs and renovations, you may want to include federal government options in your mortgage rate comparison search. The Federal Housing Administration, or FHA, has loans specifically to help borrowers bundle home improvement costs into a mortgage.

There are two of these FHA loans, which are included in the 203(k) Rehabilitation Mortgage Insurance Program. The simplest, known as the Streamline 203(k), is for borrowers who need less than $30,000 for repair costs. A more complex and lengthy application process is available for those who need improvements that cost more than $30,000. Either option is figured in the mortgage, which results in just one loan.

The restrictions

As with all government programs, there are restrictions: These loans can be used to refinance a mortgage or purchase a home, but you must live in the home. Investment properties are excluded.

You also must get a licensed contractor, preferably one with experience in 203(k) projects, to do the work. The project has to begin within 30 days of closing on the property and completed within six months. You can do some of the work yourself if it does not require a license or certification — such as minor repairs and painting. But any general construction, plumbing or electrical work must be done by certified professionals.

While the loan restricts major structural repair work, it can include such niceties as making a basement space livable, purchasing new kitchen appliances, and adding on a deck or patio. But scratch any luxury projects such as adding a built-in swimming pool, installing new landscaping or making any additions to the home. These cannot be financed using the 203(k) program.