The FHA offers a loan that provides funds to purchase/refinance and renovate a home. It’s called the FHA Home Renovation loan or FHA 203(K). Before you apply for this loan, it helps to do a little homework for the best outcome.
Decide Which FHA Home Renovation Loan You Need
There are two FHA Home Renovation loans – the full FHA 203(K) and the streamline FHA 203(K). The full version is more complicated and takes more time to get approved. The streamline version is more of a DIY loan that you can get done a little easier.
So which loan do you need? It depends on the work you need to be done. Start with the cost of the renovations. If you need more than $15,000 in work done, you’ll need the full version. If you don’t need more than $15,000 in work done, ask yourself if the work is structural. Any structural work must fall under the full FHA 203(K), not the streamline.
Following is a list of the most common streamline renovation projects:
- Painting the interior or exterior of the home
- Replacing the roof
- Installing new flooring
- Fixing or adding a deck or patio
- Finishing a basement
- Installing new windows or doors
In addition, any cosmetic changes fall under the streamline program.
Once you know which loan you need, it’s time to start finding contractors.
Finding the Right 203(K) Contractors
You get to choose your contractors, but your lender must approve them. Think of it as an extra layer of protection. The lender makes sure the contractors have the right experience and are licensed and insured.
When you shop for contractors, you want those that are experienced in the FHA Home Renovation Loan. There are specific requirements they must abide by, including a specified timeline. If they don’t follow the timeline, they risk not getting paid. The FHA requires all work to be done within 6 months. They also require a contract specifying the details of the time the work should be done. They will follow that contract and make sure the work is completed as promised.
Talk with various contractors about their experience with this loan program. Don’t just focus on the cost – look at the big picture. Sometimes paying a little more is worth it if you get a contractor that has the experience and ability to finish the work according to what your lender requires.
Once you find a few contractors, you’ll need to give the details to your lender. They will then help you determine which lender is right for the job. Keep in mind, you’ll need a contractor for any work you plan to use FHA 203(K) funds to pay for. If you want to do the work yourself, you’ll have to prove to the lender that you have the experience, time, and tools to do the work within the allotted time frame.
Preparing for the Loan Application
Once you have all of the work figured out, it’s time to prepare your loan application. The FHA Home Renovation Loan has the same application process as a standard FHA loan. You need:
- 580 or higher credit score (most lenders require a higher score)
- 31/43 maximum debt ratios
- Proof of assets for reserves (as a compensating factor)
- 5% down on the home or 3.5% equity for a refinance
- No bankruptcies or foreclosures in the last 3 years
- Stable employment and income
The higher your credit score and the lower your debt ratio, the better off you’ll be for this loan. The lender is taking a risk by providing you with a higher loan amount than your home is worth. The lender bases your loan amount on the ‘future appraised’ value based on the renovations you’ll have done with the proceeds of the loan.
The FHA Home Renovation Loan can help you make your house look exactly how you want it without paying any money out of your pocket. It’s a great way to fix up a home before you even move into it. Choose your contractors carefully and make sure you make your qualifying factors as attractive as possible in order to get attractive terms for this loan program.