Let’s talk about a type of loan that you may not have known about today, shall we? It is in the FHA, Federal Housing Administration’s loan family and it is a loan which combines financing monies and rehabilitation into the same mortgage. For example, if you found a house that you wanted to purchase but, it desperately needed some new flooring and a roof then this could potentially be the loan for you. It differs from a typical FHA loan in that you are including the repairs and renovations into the first and only mortgage on the property.
For more information on FHA Loans
For more information on typical FHA loans, you may want to check out this Investopedia article.
The Fine Print
Today, however, we are going to discuss two types of FHA 203K Loans that are currently gaining popularity. The first type is a Full 203K and the second is a Streamline 203K. Before we go any further, I should mention that I am not a mortgage broker, loan officer or in any way licensed to initiate mortgages of any kind. As well, I am not an attorney and this should not be construed as legal advice. Now that everyone is clear on that, the intention of this blog is only to bring light to this interesting and helpful loan product.
The Full 203K
When separating the two types of loans for your review, keep this in mind. There are loan limits based on physical locations. So, for the purpose of this discussion, we will be speaking of the limits in the Charleston, South Carolina tri-county area. In this lovely part of the Lowcountry, we have a maximum loan limit of $368,000.
I think it’s best to explain this type of loan with an example. Let’s say you are the buyer and you found a house that you loved in a great neighborhood but, the owner had to move out-of-state several years ago and made it a rental property in the interim. As is the case with most rental properties, it needs a bit of TLC and the owner is unwilling to pay for the repairs and maintenance needed. After inspection, you become aware that it needs some subflooring and a new roof. You come to terms on the price and decide to purchase this house for $250K. Meanwhile, your agent infers that most of the homes in this neighborhood are selling for quite a bit more than $250K and this would be a good investment. She tells you that the average home price is around $300K+ and that this house may qualify for an FHA 203K loan because after it is renovated, it’s value will likely be on par with the other homes. That means you could possibly get a mortgage for $300K and use the additional $50K to restore, repair and replace anything that was broken or in need of replacement. In this circumstance, you may want to consider getting a Full 203K loan because this one allows you to borrow up to the loan limit If after renovations are complete, it will appraise for that value.
Some Rules You Must Know
With a Full 203K loan you are allowed to include structural repairs. As well, with this one, you could potentially borrow up to the full value of the home as long as it doesn’t exceed the max loan limit of $368K. By this, I mean that if you found a home for $100K in a $200K neighborhood, you could possibly get a loan for up to the full value of the home. Mind you, all of these loans are subject to FHA appraisals, and the work must be done by HUD-approved, licensed, bonded and insured contractors. That means this loan is not for Do-It-Yourselfers. The additional funds borrowed are released on a draw basis and require periodic inspections. Please know that there are some hard and fast rules with this type of lending and you will want to familiarize yourself with all of them before you borrow.
The Streamline 203K Loan
With a Streamline 203K loan, there are a few limitations but, it still allows you to roll the repairs or renovations into the original loan. Streamline 203K’s have a max limit of $35K and with this kind of loan, no structural repairs are allowed. This loan can be used for appliances should you need them and it is also subject to appraisals. Again, the work must be done by HUD-approved, licensed, bonded and insured contractors so no Do-It-Yourselfers here either.
Streamline 203k Guidelines are as follows:
Minimum loan amount is $5,000
Maximum cash for repairs is $35,000, or; Up to 110% of the purchase price of the home
Must meet the FHA loan limit guidelines
The home can’t be vacant for a period of more than 30 days
Construction is required to be completed within 6 months
Must be Owner Occupied, Not available to real estate investors
All repairs and renovations must be finished 1 month before closing
Do You Still Have Some Questions?
My friend, Kenny Fuqua, at Lifetree Lending in Mount Pleasant, South Carolina is a great resource if you are looking at this product for yourself. His number is (843)718-8960. Feel free to give him a call if you have any questions on the specifics of these types of loans.
In the meantime, if I can help you buy or sell any property in the Lowcountry, please don’t hesitate to call, text or email me. I look forward to hearing from you.