Buy a fixer upper and Make it your own
Buy a fixer-upper and make it your own with the 203k
Let's say you find your next home in the perfect area, with the optimal layout and primo school system for the ideal price. The only problem is, the perfect home does not include the updated kitchen or the extra bathroom you need for your brood. Nearby, upgraded homes are priced out of your budget. The rehab opportunity sounds nice, but you do not have the cash available to buy a house and dump $ into it for renovations. Is there another option? YES! The FHA 203k loan may be your answer.
Unlike standard mortgage loans, this loan, officially known as the Federal Housing Administration’s 203k Rehabilitation Mortgage Insurance Program, wraps renovation and purchase costs into one mortgage.
Why is the 203k so great?
The 203k loan product could give you the option to buy the fixer-upper, redo the kitchen, including that fantastic Wolf range and SubZero fridge you always wanted. Your new home mortgage and the renovation costs would all be wrapped into one loan, with one down payment, at conventional interest rates and terms. Most all renovations qualify for the program: New floors, remodel the bathroom, revamp the kitchen, or even add a new room! Fix the roof, repair the driveway, add outdoor living space....most improvements will qualify. The interest you pay on loan, including the interest on the repairs is tax deductible. This is usually a better choice than forking out the cash or using credit cards to pay for the renovations. If you paid for improvements with a credit card, you wouldn’t be able to deduct any of those interest payments. Your cash could be used in many other ways in other investments (like a rental property).
The program is flexible too. For example, you can roll up to 6 months of mortgage payments into the 203k loan to help with the transition if the new home is not ready to live in. The 6 months gives you time to rehab the property while not making payments.
How does it work?
There are two types of 203k loans: a standard option and a streamlined option. Depending on your needs, one may be better for you than the other.
Streamlined Loan. This option is limited to a maximum of $35K in repairs. There’s no minimum you need to spend, so if you’d just like to replace your roof or floors, you can wrap the extra $'s into your mortgage and avoid cash of expenditures. Repairs must start within 30 days of your loan closing and be finished within 6 months. To qualify the renovation must be non-structural, non-luxury items.
Standard Loan. For this loan, you must make at least $5k worth of repairs. Almost any home improvement project qualifies as long as it adds value to the property. No, your new shark tank or hot tub will not be eligible, but updating the windows or adding insulation would qualify.
How to qualify
You’ll need to meet the same requirements as any other FHA loan:
Credit score must be at least 620 or 640, depending on the lender • Maximum debt-to-income ratio 41% to 45% • Down payment of 3.5% or more
Total loan amount (including both the purchase and renovation costs) must be lower than the maximum loan limit for your area. FHA loan limits are based on which county the property is in and varies based on the # of units. Your Realtor or Loan expert should be able to give you the exact limits for your county and situation.
You must be an owner-occupant of the property you intend to renovate unless you use the Homestyle 203k. If you are a seasoned or wannabe real estate investor, the 203k Homestyle is something you should check out. This allows an investor to purchase a 1 - 4 unit property, and add any repair costs into the loan, significantly increasing your investment leverage and cash on cash ROI.
The Process
Get pre-approved for the 203k purchase and renovation. You should work with a lender who has experience with this loan program. I can't stress this enough…do not go home shopping without making sure you have the financing lined up.
Work with a professional Realtor (Like me) to shop for a home with renovation in mind. This will open up all kinds of doors since you do not need something move in ready. Your purchase contract should include the correct contingencies for the 203k since the closing can take longer than standard loans.
Once you find the property you like, make an offer and apply for the 203k loan for your renovation and purchase.
Identify contractors who can do the work. Most 203k lenders can recommend contractors to you. You need at least one bid (and sometimes as many as three) for your repair work from licensed professionals. You make the decision as to who does your job, but your lender needs to see the bids to make sure the amount you are being charged is reasonable. Your lender requires an appraisal of the current home value and will base the loan amount on that appraisal plus the cost of the repairs. Most lenders require an inspection and title policy update when the job is complete to make sure all contractors have been paid, and no liens have been placed on the property.
In summary, the 203k FHA loan could be the perfect answer to getting the house you wanted and may save you money in the end vs. paying retail for a wholly remodeled property. The process is not complicated but there are several extra steps, and the purchase will take more time to close vs. a standard transaction.
Contact me to learn more about the 203k or homestyle loan and start looking for that fixer-upper you always wanted. Working with a professional Realtor sets you up for success from the beginning, and as a buyer, there is no cost to you.
Jasson Farrier, REMAX Revealty is a professional Realtor and real estate investor serving Central, Ohio.