With warmer weather on the way and lots of properties still available for purchase (especially those in need of some TLC), the FHA 203K rehab mortgage is something you may want to consider.
The 203K program will allow you to purchase a home and borrow the money to make improvements to it in one mortgage. It allows you to borrow against a property that, in its unimproved state, may have a lower value, and make improvements to increase its value over time.
There are many properties that can’t be sold using conventional mortgages, because they are unable to pass an appraisal. These same properties – perhaps short sales or foreclosures – may be priced too high for you to want to invest in. This leaves a void in the market and an opportunity for you to negotiate the price downward to your benefit.
While obtaining an FHA 203K mortgage is more involved than taking out a traditional mortgage, it’s often worth the effort.
How a 203K loan works:
The first step in the process is for you to contact a lender that can process 203K loans. While it’s common practice for most lenders to handle 203K products, some don’t, so make sure that your lender does offer them.
The next step is to locate a suitable property. Multiple cost estimates and a special appraisal will be ordered to calculate its post-improvement value.
If the cost of the property plus repairs adds up to less than the post-improvement appraised value, you will be able to proceed with the mortgage process. At this point, the process will be similar to most other FHA mortgages.
Repairs that can be made using 203K money include furnaces, water heaters, carpeting, and roofs, among others. All contractors who submit bids must be bonded and have references testifying to the quality of their work. Contractors must also have their own lines of credit to purchase materials involved in the project.
Expect the mortgage process to take 30 to 45 days from start to finish, depending on how much work needs to be done and the building permits required. Once you go to close, the money for the work to be done is directed to an escrow account.
A 203K consultant will be brought into the project to protect you (the buyer) and the FHA. This individual will help manage the project from both quality and timeline perspectives, ensuring contractors remain on task and on time.
Draws are paid to the contractors in stages and signed off by the consultant. At the end of the project, the contractor will be owed money; this is by design to prevent contractors from not completing the projects.
The FHA program can be a great opportunity for you. It benefits not just the buyer, but also the neighborhood as a whole: Keep it in mind!