A FHA 203K rehab loan, also known as a renovation loan, is a loan that allows for homeowners to purchase or refinance their current home, while also getting the necessary financing required to complete renovations of the home, through a single mortgage. This simplifies the process by requiring homeowners to only apply for one mortgage instead of having to apply for multiple loans.
Previous to the establishment of renovation loans, purchasing a fixer-upper, or a home that needed extensive updating was exceptionally difficult. Most banks wouldn’t approve a loan for a home that was in less than stellar condition, until after the necessary repairs had been completed; although the required repairs couldn’t be completed without first purchasing the home. Ultimately, this put homeowners in a difficult position of not being able to get the financing that they needed.
When renovation loans came around, purchasing a fixer-upper was made drastically easier, providing homeowners the ability to refinance or purchase a fixer-upper all with one mortgage. However, there are a few requirements that come along with applying for and executing a renovation loan on your home.
Requirements for Renovation Loans
The Department of Housing and Urban Development (HUD) has outlined certain requirements that must be met by the prospective homeowners in order to qualify for a renovation loan. Among the requirements, you will need to find a property that requires some cosmetic updating or repairs, finding a qualified lender, and meeting all lending requirements. These lending requirements include having a minimum credit score or better, debt-to-income ratios, and proof of your income.
Once all of your financing has been approved, and your offer accepted, a closing date will be set. Upon closing on your new home, a repair escrow account will be established, and repairs/renovations must begin within 30 days, and be completed within six months.
With a Limited K Loan, the contractor performing the repairs will receive 50% of the total agreed upon amount for the repairs within 5 days of closing on the home. The contractor will then receive the remaining balance for the work, upon completion. When you have a Consultant K Loan, a HUD 203K Loan consultant will work with you, as the homeowner, where they will inspect repairs and renovations made to the property as they are completed. This allows for interim payments to be made based on the completed work passing a final inspection. Regardless of the type of loan, after the final disbursement has been made, any funds that are remaining will be applied to the principal balance of the loan.
Advantages of 203K Loans
Renovation loans are intended to help homeowners either improve their current home, or to purchase a home that can benefit from upgrades, renovations, or repairs. This also allows for homeowners to build up home equity by updating and repairing their home. This not only allows for homeowners to update their home to fit their style, but it also allows for them to generally purchase a home at a much lower asking price, due to the condition of the home, therefore increasing its value due to repairs, renovations, and updating.
Additional advantages that come along with a renovation loan include low interest rates, and low-down payment and saving options. A 3.5% down payment is required, therefore, you won’t have to deplete your savings account to come up with a down payment to get into a home. Renovation loans are insured by the FHA, so the qualifications are generally more lenient than if you were to apply for a conventional loan.
A 203K rehab loan is a convenient way to finance your home renovation needs, without having to have a perfect credit score, a huge down payment or pay high interest rates. To learn more and see if you qualify for a renovation loan, contact Geneva Financial, LLC today!