How to Buy Your First Home with a Renovation Loan

As a first-time home buyer, did you know that you can buy a home, renovate it, and move in – all with just one mortgage?   You just may be able to!  One of these loans is called an FHA 203k Loan.  When there are not many homes on the market in a buyer’s target area, it may be a good time to consider using an FHA 203k Loan. 

What Is an FHA 203k Loan?

An FHA 203k loan is a government-insured mortgage that allows the buyer to buy the home and renovate it before moving in.  FHA stands for Federal Housing Administration, and it is a government agency within the Department of Housing and Urban Development (HUD).  It provides mortgage insurance on loans made by FHA-approved lenders.  Buyers can qualify with down payment as low as 3.5% of the purchase price and a credit score as low as 580! 

To qualify, you must get pre-approval through an FHA approved lender that specializes in FHA 203k mortgages and meet their standard qualifications – which you would still need to do for any type of traditional mortgage.  Keep in mind that not all FHA lenders are certified for FHA 203k mortgages.  So, if you are thinking about using one, it is good to check with your lender to make sure they can qualify you first.  If you need lenders, feel free to reach out to me (Click Here).

Types of FHA 203k Loans

There are basically two types of FHA 203k loans.   

Limited (Streamline) 203k Loan

• This program can finance up to $75,000 for repairs, renovations and improvements on their home purchase
• The repair/renovation items are to be identified by home inspector or FHA appraiser, and the buyer.
• Repairs/renovation items are minor remodeling and non-structural.  Home buyers can remodel the kitchen, roof repair/replacement, paint the interior or install new carpet – these are examples of acceptable items under the Limited 203k loan.
• Can take up to 6 months to complete (could be less or more depending on the scope of work)
• Buyers will need a home inspection
• Hiring an FHA HUD consultant is optional

Standard 203k Loan

• This program is for major rehabilitation and repair of single-family homes
• The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area (your lender will let you know).
• Work can take up to 10 months or longer to complete (depending on the extent of the scope of work)
• Buyers can finance up to 110% of the after-repair value (ARV) of the home being purchased. An appraiser will come out to determine the value of the home before and after the renovation.  That value will let the buyer know the amount of the mortgage they will be paying.
• This program is more widely used by homebuyers than the Limited 203k Loan.
• Home inspection may not be required (if major rehabilitation will be done)
• FHA HUD consultant is required
  

What Types of Properties Qualify for FHA 203k Loans

Types of properties that can qualify for the FHA 203k are:  single-family detached, townhome, or 2-4 multi-family units.  Condominiums, apartment style and townhome style (in a development), may be acceptable, but they need to be FHA approved.  Your lender will be able to let you know.

Also, for the standard FHA 203k loan, the property must have an existing foundation that will be remaining.  A completely brand-new construction will not qualify for this program.  So, everything can be torn down, even all the walls, except for the foundation.

The Buying Process Using FHA 203k Loan

The buying process is somewhat different from the buying process of a traditional mortgage.

A. Home Purchasing Stage

1. Buyer meets with real estate agent and has a consultation. 
2. Buyer then meets with an FHA 203k approved lender and gets qualified for an FHA mortgage.
3. Working with their agent, buyer than finds a property that requires renovations.   Offer is accepted and a contract is signed with a 60-day closing date.  Lender will need 60 days to process the loan.  
4. Buyer then determines which FHA 203k program they want to use – limited (streamline) or standard
5. Lender then selects 203k HUD-approved consultant.  Note:  this step is optional for the Limited 203k loan but is recommended.
6. Consultant visits the home with the borrower and their agent and prepares a scope of work estimate.  At this stage the borrower lets the consultant know what renovation items they would like to include.
7. Consultant, lender and borrower selects a 1-3 contractors, receives estimates based on the scope of work items and selects which contractor will do the renovations.  Contractors need to be approved by the lender and consultant.  To find approved contractors, you can go to the website 203kcontractors.com (click here).
8. Closing is completed, the seller sells home to the buyer at the end of the 60 days and the renovation can begin.

B. Construction / Renovation Stage

1. Contractor obtains permits before starting the work and schedule is developed between contractor, consultant, lender and buyer. Renovation work can take as long as 10 months
2. Contractor completes first phase of the project and consultant and buyer review that the work is complete and satisfactory.
3. Consultant and borrower sign the draw release and submit to lender for payment.  Draw release is the money the contractor will be paid for satisfactory completion for this portion of the work.  (This is included in the schedule agreed to by all parties). The check that is released to the contractor is a two-party check made payable to the buyer and the contractor.
4. The process continues until all the work is completed.
   
   

C. Project Completion Phase

1. Buyer reviews the work completed and provides a release letter indicating all that all the work is completed satisfactorily,
2. Consultant then verifies that the work is complete
3. Consultant obtains certificate of occupancy or building permit close-out approval
4. All money that remains in the escrow account will be released to the contractor.  Note:  if there is money left over after the contractor is completely paid, the buyer can pay it towards the mortgage principal or use it to upgrade items on their new home.
5. Lender will then be responsible for closing out the entire project meeting FHA requirements.

So that is pretty much the process involved when using the FHA loan.  Keep in mind that the mortgage amount the buyer will be paying off is the purchase price of the home plus the renovations combined in one payment. The key is finding a home that is priced relatively low plus the renovations to determine your monthly payment.  The important thing is once the monthly payment is determined, than you can see if this type of mortgage will work for you. 

This may not work on every home you may be interested in, but it is a very good option you may have to make your homebuying dreams come true.

There are a lot of more details and information for this loan program, if you are interested in learning more to set up a meeting with me, a consultant, and approved contractor, let me know.    You can email me anytime (Click Here).