FHA 203k Loan Lets You Put Home Repair and Remodeling Money in Your FHA Loan

What if you could buy a home with 3.5% down and include the necessary repairs and remodeling in the mortgage – even if your credit is not the best?

One of the problems with many Daytona Beach homes in foreclosure or available for short sale is that need work to make them livable. With conventional financing, you will probably need to 20% down and then mortgage 80%. Then you still need to pay for the repairs.

The FHA has a loan program call the SF Rehabilitation Loan Program (203k) that they call Funds for Handyman-Specials and Fixer Uppers. On the FHA website they state the purpose of the program:

The purchase of a house that needs repair is often a catch-22 situation, because the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.

HUD’s 203(k) program can help you overcome this obstacle by enabling you to purchase or refinance a property plus the cost of making the repairs and improvements in one mortgage. The FHA-insured 203(k) loan is provided through approved
lenders nationwide and is available to persons wanting to occupy the home.

The beauty of the FHA program is that, as long as the appraisal, after the repairs, does not exceed the loan value, all other FHA loans features, like low down payments (about 3.5%) and availability to less than prime credit buyers is available.

The FHA outlines the program on their website:

• A potential home buyer locates a fixer-upper and executes a sales contract after doing a feasibility analysis of the property with his/her real estate professional. The contract should state that the buyer is seeking a 203(k) loan and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender.
• The homebuyer then selects an FHA-approved 203(k) lender and arranges for a detailed proposal showing the scope of work to be done, including a detailed cost estimate on each repair or improvement of the project.
• The appraisal is performed to determine the value of the property after renovation.
• If the borrower passes the lender’s credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the allowable closing costs. The amount of the loan will also include a contingency reserve of 10% to 20% of the total remodeling costs and is used to cover any extra work not included in the original proposal.
• At losing, the seller of the property is paid off and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehabilitation period.
• The mortgage payments and remodeling begin after the loan closes. The borrower can decide to have up to six mortgage payments (PITI) put into the cost of rehabilitation if the property is not going to be occupied during construction, but it cannot exceed the length of time it is estimated to complete the rehab.
• Escrowed funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of thejob, 10% of each draw is held back; this money is paid after the lender determines their will be no liens on the property.

Yes, you can still get the Home Buyers Tax Credit with FHA loans. So you can buy a home that needs work, include that work in the mortgage, your contractor does the work, and then you move in. Plus you can get a tax credit for up to $8,000 if you go to contract before April 30, 2001. Plus, you may be able to apply the credit to the purchase costs of the home. Wow!