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FHA’s 203k Rehabilitation Mortgage
By Ray Zimmerman
The majority of individuals residing in the United States have never heard of FHA’s 203k Rehabilitation Mortgage loan program. For some strange reason, these mortgage loans have been one of the best kept secrets in the mortgage industry for years. What exactly is a rehabilitation mortgage loan? These types of loans are really unique because you can either purchase a single-family property or refinance a single-family residence that you now own and make repairs and/or improvements at the same time. This is an FHA (the Federal Housing Administration) loan which part of and insured by HUD (the U.S. Department of Housing and Urban Development). The 203k program will provide a home buyer with an opportunity to either repair or improve the home that they want to buy utilizing one loan and one monthly payment. Suppose you found a $100,000 home that you really liked and wanted to buy, but you were unable to do so because this home needed a new roof that would cost approximately $15,000 and you simply did not have the extra cash. At the same time, you wanted to replace the carpeting since it would definitely improve the appearance of the home. This replacement cost would be an additional $6,500. It would also be nice if you could replace all of the kitchen appliances which would cost $3,850 more. If you know anything about FHA loans, you realize that FHA will not approve a home loan if anything needs to be repaired. In the previous example, FHA would not have approved the loan if the roof was not replaced. The carpet and the kitchen appliances are not required repairs. They are simply desired updates in the home. By utilizing FHA’s 203k, you would be able to borrow $125,350 which would provide you with $100,000 for the house, $15,000 for the repair of the roof and $10,350 to replace the carpet and the kitchen appliances. The maximum allowable for repairs and improvements is $35,000, which includes closing costs. Basically, a home owner can utilize FHA’s 203k in the same manner as those individuals that are purchasing a home. The only difference is that they will refinance their home to included needed renovations and desired improvements. The total amount available is based on the appraised value of their property. Many home mortgage loans today require the buyers to make a 10% - 20% down payment. If purchasing a $100,000 home, the required down payment would be $10,000 to $20,000. The minimum down payment for FHA’s 203k mortgage loan is only 3.5%, or $3,500 per $100,000. Most mortgage loans require the home buyers to provide documentation during the loan process to show that they have enough cash on hand for the down payment and the closing costs. The only downside to this loan is that the buyer will have to pay a higher interest rate than what is being charged for conventional mortgage loans. The 203k is certainly worth considering if this is the only way that you have to purchase a home. Hopefully you will be able to refinance this loan at a later date and reduce your interest rate. Buying a home can be a costly investment and require the payment of thousands of dollars at the closing table. Many individuals find that they will need additional financial assistance to pay all of the closing costs and prepaid items. If this is your particular situation, you'll be happy to know that there are two basic ways for you to secure extra cash for these expenses. FHA’s 203k program will permit the seller to provide from 1% - 6% cash concessions to the home buyer when closing the loan. If the seller is willing to negotiate on price, they will usually consider providing cash concessions to the buyer. If the potential buyer does not have enough available cash for the down payment and the closing costs, the seller will be stuck with the house that they have up for sale. If the seller really wants to sell their home, they will most likely consider helping their potential buyer with cash concessions. Even if you have enough cash on hand, it doesn’t hurt to ask. You might just be able to save yourself several thousand dollars. Generally speaking, you'll find that sellers do not want to provide cash concessions to the buyers because they will actually receive less profit on the sale of their home. Not to worry! There’s a solution to your problem if the house will appraise "As Is" for no less than the current selling price. It is quite possible to add from 1% to 6% to the sales price of your home in the form of "Seller's Concessions" to pay for some or all of the closing costs and prepaid items. Only because of the exceptional way in which the FHA’s 203k program is structured can this be accomplished since the maximum loan amount is based on 110% of the "After Improved Appraised Value" of the property. Since the sellers will receive their asking price, they will generally be very happy to accept an offer like this and you have been able to purchase your home by taking full advantage of FHA's 203k. This program allows family members and friends to provide the home buyers with a cash gift for up to 100% of the closing costs and prepaid items. Whenever a cash gift is provided in this manner, the donor is required to complete and sign a "Gift Letter" prior to the closing of the loan. Needless to say, FHA’s 203k will be extremely beneficial to those individuals that may not have the financial means to purchase and improve a single-family dwelling. You will find that there is a considerable amount of information that you will need to review, prior to considering FHA’s 203k Rehabilitation Mortgage. Links to various information sources have been provided below for your convenience. |
HUD - 203k Information
| HUD - 203k FAQs
| HUD - FHA Information
| YouTube - 203K Basics
Federal Housing Administration
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While screening this well-written piece I was wondering who the author is as Qondio doesn't have a regular contributor on mortgages at this time. You're an amazingly versatile writer. I am sure many people will benefit from this outstanding intel.
 | | nick May 28, 2011 04:00 | |
CONTRIBUTOR'S REPLY
I didn't mention in my profile that I was a loan officer for awhile with a mortgage company. Thanks so much for the kind words. Have a great day!
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This intel was contributed by crawfish
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