The Federal Housing Authority (FHA) was established in 1934 to improve ownership opportunities for all Americans and has financed over 40 million homes since that time. FHA insured loans continue to be popular today as more and more Americans become aware of the benefits of this powerful government backed program.
The FHA is 100% funded by the proceeds from mortgage insurance included in the mortgage payments. It is the only government agency that is entirely self-funded with no assistance from the American taxpayers.
The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue.
The FHA 203k Renovation Loan Program provides funds for both the purchase and renovation of a home all under one mortgage loan.
There are only two types of FHA Loans:
1. The Streamline 203k Loan is designed for projects with renovations costs that are less than $35,000. These projects normally are not nearly as extensive and don’t require a consultant or architect.
2. The Standard 203k Loan is for projects that have renovations costs exceeding $35,000. They are normally more complicated projects that involve structural changes, exterior landscaping, or major renovations. The Standard 203k is also used if your project requires architectural exhibits.
The Streamline 203k Loan program is used for projects that are under $35,000 and the repairs are minor, nonstructural repairs that don’t require an architect. Here are some repairs that qualify:
- - Replace roof, gutters and downspouts, and siding
- - New windows and doors as long as they are in the same locations and of same size
- - Accessibility improvements if required for disabled homeowners
- - Provide new HVAC system to replace existing
- - Appliances to replace existing
- - Minor upgrades of plumbing and electrical systems
- - Lead base paint abatement
- - Minor remodeling that does not include any structural repairs
- - Minor basement remodeling
- - Exterior deck, patio and porch repairs or replacement
- - New flooring
- - Basement waterproofing
These items do not qualify for use under the Streamline 203(k) Loan Program:
- - Any repair or improvement work that cannot be completed within 6 months
- - Any major remodeling work, especially if architectural exhibits are required and/or structural walls are being disturbed
- - Any structural repairs that are required
- - Any exterior landscaping that are required
The 203k Loan Program is designed for single family homes including condos, as well as 1-4 unit buildings.
Only the Standard 203k Loan Program does allow for up to 6 months of mortgage payments to be included in the renovation funds to cover the mortgage during the construction process.
The appraiser is provided a copy of the General Contractors bid documents so that he can identify the construction work being completed along with their costs. The appraiser will then determine the value of the property after the repairs have been completed. This appraisal will then help determine the approved loan amount on the property.
A 203k Loan can be used to purchase any HUD owned property that has been determined to be eligible for the 203k Loan Program.
The FHA does allow the use of an EEM for up to 5% of the value of the property for funds required over the FHA loan limits and the buyers approved loan amount for improvements. The only stipulation is that these improvements must increase the energy efficiency and lower the utility costs of the home.
The buyer must demonstrate professional expertise in a given activity in order for them to do any rehabilitation work. However, the borrower cannot be paid for any labor, only materials used. The work right up must still show the overall cost of the repairs required in case the homeowner is unable to perform the work.
At the loan closing the funds are disbursed for the home purchase with the renovation funds being placed in escrow by the lender. The renovations funds are then paid in incremental draws as the work proceeds with the final payment being paid upon completion and final inspection.
No. The borrower must occupy the property. The loan can be used to purchase up to a 4 unit building as long as the borrower will be occupying 1 of the units.
Any funds remaining after the completion of the renovation process can be used for additional improvements to the property. If not used for additional improvements, the funds will be applied towards paying down the loan principal.
The construction work must begin within 30 days of the closing of the loan and must be completed within the established time frame. The total time for renovation must be completed within 6 months. There are instances when these time frames cannot be met. In those instances it is necessary to file extensions with the bank describing the reason for the delays.