With the beginning of the competitive spring buying season, you may be interested in buying a fixer-upper. If so, the FHA 203K rehab mortgage is something to consider.
The 203K program allows you to purchase a home and obtain the money to make improvements to it in one mortgage. While it is a more involved process than taking out a traditional mortgage, you can borrow money against a property with a low value in its unimproved state and improve it to increase its value.
Repairs that can be made using 203K money include furnaces, water heaters, carpeting, and roofs, among others.
How it works: The first step is to find a mortgage lender who can process 203K loans. It’s common practice with most lenders to handle these loans; however, some don’t. Be sure your lender offers 203K products.
Then you need to find a fixer property you’re interested in purchasing. Once it’s been identified, you can proceed with the process of applying for the loan; you’ll be facing multiple cost estimates, and a special appraisal will be ordered to calculate the post-improvement value of the property.
A 203K consultant will also be brought into the project for your protection and that of FHA. The consultant will help manage the project from quality and timeline perspectives.
If the cost of the property plus the repairs adds up to less than the appraised value, the mortgage process will continue as it would with most other FHA mortgages. Expect it to take 30 to 45 days from start to finish.
Once you go to closing, money for the repairs goes into an escrow account. Draws are paid to the contractors in stages as the work progresses.
Be aware that there are special rules regarding the hiring of contractors; your mortgage professional can answer these and other questions you may have.