More and more of my recent inspection requests are as a HUD Consultant where I play an important role in the 203(k) loan process. I knew nothing about this as a home inspector until I was recruited by MakeOver Homes https://www.makeover-homes.com
For those of you interested, but unfamiliar with 203(k) loans, here's a primer:
What Is An FHA 203(k) Rehab Loan? It is a form of home financing or refinancing that enables home buyers and homeowners to combine both costs associated with the real estate itself and expenses due to be incurred through renovation into a single mortgage. Basically it allows the borrower to ROLL RENOVATION COSTS into the mortgage.
How Does An FHA 203(k) Loan Work? The loan takes into consideration the AFTER RENOVATED VALUE to determine the value. A client obtains a renovation BID from a contractor and that bid amount and scope of work are given to the appraiser to come up with an ARV. Then the lender includes the renovation costs, plus other allowable costs into the loan.
What Improvements Can NOT Be Included In An FHA 203(k) Loan? Luxury items such as a pools, hot tub, outdoor firepit or BBQ pits are not deemed eligible expenses by the FHA under the terms of a 203(k) loan. As a general rule, any upgrade or improvement that does NOT improve the actual functioning or attractiveness of the property won’t be covered under an FHA 203(k) loan.
What Type Of Property Qualifies For An FHA 203(k) Loan? Owner Occupied Properties. 1 to 4 units as long as the borrowers primary residence is one of the units.
What Type Of Property Do NOT Qualify For An FHA 203(k) Loan? Certain types of properties may also be prohibited from application, such as mixed-used properties (which combine residential and commercial space) and co-ops. Be sure to do your research before applying for an FHA 203(k) loan. Some properties do NOT qualify. An experience 203K Consultant can help.
Who Can Qualify? FHA 203(k) Loan Qualifications As with any personal loan or mortgage, home buyers or homeowners must meet certain minimum requirements in order to qualify for an FHA 203(k) loan. These requirements are similar to normal FHA loan requirements.
110% Loan To Value Using An FHA 203(k) Loan FHA allows a loan amount up to 110% of the After Repaired Value. This is helpful when renovating items that do not add much value to an appraisal. This rule gives the borrower a little more wiggle room vs. using a traditional mortgage or other type of renovation loan.
Can An FHA 203(k) Loan Be Used To Refinance A Home? YES, it does allow homeowners to refinance and roll renovation costs into the new mortgage.
In summary, the choice between an FHA mortgage and an FHA 203(k) mortgage depends on your specific needs and the condition of the property you're interested in. If you're looking to buy a home that needs significant renovation, the FHA 203(k) loan can be a valuable option, but it does come with added complexity and requirements. On the other hand, a standard FHA mortgage may be more straightforward but may not provide the funds needed for extensive repairs or renovations.
It's important to carefully consider your financial situation and the condition of the property before making a decision. Consulting with a mortgage lender experienced in both types of loans can be beneficial.