FHA stands for the U.S. Federal Housing Administration and was established in 1934 by the government to improve housing conditions and opportunities for people to own homes in America. FHA has financed more than 40 million homes since this was established. FHA also plays an important role in returning veterans to help them get a home as well. FHA has also helped construction of millions of apartments to meet the needs of handicapped, elderly and lower income citizens. FHA is gaining popularity each year as more people become aware of its benefits.
An FHA loan provides lenders with insurance that protects them against losses if the homeowner mortgage defaults. The reduce risk allows lenders to offer loans to buyers with poor or less than average credit score and to lower down payments. BEcause of this insurance factor there are strict guidelines that the lender must follow when giving out an FHA loan.
An FHA 203k loan is a renovation loan program that makes a package mortgage loan that gives out the funds for the purchase and renovation of a home. After the purchase of the home is closed, renovations funds are held in escrow which is held typically by a third party which are used to pay for the pre-determined renovation work done by approved contractors. Because of the complexity of lenders typically not giving out money to buy a home until repairs are complete and repairs may not be able to get completed until the house has been sold, the FHA 203k loan hopes to overcome that obstacle. FHA 203k loans help to overcome this by enabling a borrower to borrow the funds for both the purchase or refinance and the renovation costs into one mortgage. These loans are available nationwide by approved banks and lenders to owners who will occupy the home themselves.
Types of FHA 203k Loans
- Standard 203k Loan: this loan is intended for more complex projects that involve intense changes such as structural issues, like room additions, adding exterior landscaping, or any other renovation projects that prevent you from living in the home, A standard 203k loan is also used if your home requires engineering or architectural inspections or drawings.
- Streamline 203k Loan: this loan is for less complicated improvements and projects that do not exceed $35,000 in renovation expenses.This loan does not require the use of consultants, engineers, or architects. This is typically the less costly and simple option.
The streamlined 203k loan is intended to help with home improvement projects that are more simple and less costly. Listed below are the improvements that are eligible under the streamlined 203k loan.
- Septic system and/or well repair or replacement
- Accessibility improvements for persons with disabilities
- Minor remodeling, such as kitchens, which does not involve structural repairs
- Repair/Replacement/upgrade of existing HVAC systems
- Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
- Basement finishing and remodeling, which does not involve structural repairs
- Basement waterproofing
- Repair/Replacement of roofs, gutters and downspouts
- Painting, both exterior and interior
- Repair/replace/add exterior decks, patios, porches
- Repair/Replacement of flooring
- Repair/Replacement/upgrade of plumbing and electrical systems
- Window and door replacements and exterior wall re-siding
- Lead-based paint stabilization or abatement of lead-based paint hazards
- Weatherization, including storm windows and doors, insulation, weather stripping, etc.
The Items that are ineligible for the Streamlined 203k loan are major projects that change a load bearing wall, an addition of a room, repair of structural damage, repairs that require detailed drawings from engineers and architects, and landscape improvements. Any work that takes the repairs longer than six months of activities that require more than two payments for a specialized contractor are ineligible as well.
Some Common questions of the streamline 203k loan are:
What kind of housing can the streamlined 203k loan be used on?
Following the guidelines, this program is eligible for single family homes and 1 to 4 unit buildings, condominiums,and any residential portion of a building that you will inhabit.
How are the funds distributed for the purchase and renovation?
Once the loan is closed the funds are distributed for the home purchase and then to the previously approved and agreed upon renovation funds. The renovation funds are placed with a third party and then paid out when needed to the appropriate contractors. Everything such as the timing of the payments and how much money is determined between you and your lender.
Can the borrower do the rehabilitation work?
If a borrower demonstrated a professional expertise on a given renovation they will be allowed to do the work. One thing to be aware of though is that a borrower will not be paid for any labor costs, just the materials that are used.
What if there are extra funds after the work is complete?
Any leftover funds will be used to pay any other renovation costs that need to be taken care of. After that it will be used to help pay off the balance of your loan.
Is there a time limit for the renovation?
After the loan has been closed the renovation has to begin within thirty days and must be finished within the determined time frame discussed between borrower and lender. All renovations must be complete within six months total.