Clients and Realtors in the Chicago area often ask me questions on FHA 203k renovation loans so I thought I would take the top 20 and present answers here in a concise format.
- With an FHA 203K if I put 20% down do I still pay mortgage insurance each month? With current FHA regulations in 2014 the monthly mortgage insurance component is required regardless of the size of down payment and remains in effect for the life of the loan. With a 203K there may be hidden equity apparent after the rehab is done which allows the owner to refinance out of the 203K into a Conventional loan with little or no monthly mortgage insurance. A 203K should not be viewed generally as a permanent loan. There may be an increase in value due to the rehab work such that new equity value is created, raising the value of the property enough to refinance into a Conventional loan.
- Do 203K mortgage payments have to be made while the property is still under renovation? With current FHA regulations in 2014 the monthly mortgage insurance component is required regardless of the size of down payment and remains in effect for the life of the loan. With a 203K there may be hidden equity apparent after the rehab is done which allows the owner to refinance out of the 203K into a Conventional loan with little or no monthly mortgage insurance. A 203K should not be viewed generally as a permanent loan. There may be an increase in value due to the rehab work such that new equity value is created, raising the value of the property enough to refinance into a Conventional loan.
- A Full 203K does allow up to 6 months of house payments (mortgage, property tax escrow, home insurance, FHA mortgage insurance) to be added to the loan for the months the property cannot be safely lived in as determined by the FHA Consultant. Doing so is helpful so borrowers do not have double housing expenses during the months the new property is under renovation and cannot be occupied. The Streamlined or Limited 203K does not allow any house payments to be added to the loan amount.
- Can I work with any contractor I want to on a 203K ?
- A borrower may select any licensed contractor but each contractor must be validated to be sure a license is current, insurance coverage is current and any required Workmen’s Comp policy is in place. Additionally at least 2 references are checked and often a credit report may be viewed as well. A contractor doing a 203k project should have adequate cash flow in order to begin work. The validation process is done in order to be sure a contractor is capable of performing projects both under $35,000 and larger.
- Will the contractor receive the rehab funds from the lender directly ?
- Generally about 10 days after closing on a Streamline or Limited 203K ( a 203K with $35,000 or less in rehab funds) a check for half of the rehab funds is sent to the borrower as a two party check, made out to the borrower and contractor. On a Full 203K which is one with more than $35,000 in rehab funds, there is no advance check sent out. Rather the contractor must fund the first phase of work out of pocket. Then after the first phase is complete a contractor will alert the FHA Consultant who is always present to oversee a Full 203K project, to inspect the work and sign off on that phase and send the lender the paperwork authorizing payment to the contractor with a two party check, sent to the borrower for signature. Up to 5 phases of work may occur with a Full 203K and all work on any 203K must be completed within 6 months of starting. Work must begin within 30 days of closing on any 203K.
- When purchasing a property with a 203K can the Seller pay the Buyers closing costs ?
- Yes, a Seller may give the Buyer a closing cost credit worth up to 6% of the sale price to pay the Buyers closing costs, pre-paid interest or property tax escrows, first year home insurance policy, attorney fee, etc. PowerSaver grant is also available to help pay 203K closing costs.
- Can I use a 203K to build a totally new house ?
- No, a 203K loan cannot be used to construct a totally new house or building. But a 203K can be used to rebuild a structure from the remaining foundation. For example an owner of a smaller, outdated home may use a 203K to tear it down to the original foundation and build a new home on that same foundation.
- Can I use a 203K to renovate a small apartment building I will live in ?
- Yes, an owner occupied 2 to 4 unit apartment building can be renovated with a 203K loan.
- Can I use a 203k just to remodel my current house ?
- Yes, a 203K can be used to update, rebuild, expand or otherwise improve a current residence. This is done as either a refinance of an existing mortgage or by using the 203K as a new mortgage if none is present.
- With a 203K is it possible to take a 6 unit or larger building and make 4 units out of it ?
- Yes, a 203K can be used to downsize a larger owner occupied apartment building into 4 or less apartments. Or if zoning allows a 203K can be used to increase the number of apartments to a maximum of 4 in one building. Also a 203K can be used to convert a 2 to 4 unit building into a single family house. All must be owner occupied.
10. Is there a way to use a renovation loan to buy a partially commercial & residential building and renovate it ?
- A 203K can be used to renovate a mixed use, owner occupied building provided the 203K rehab funds are used only to improve the residential portion of the building up to 4 units.
11. Can a 203K be used to purchase a home that is unfinished by a previous owner ?
- A 203K can be used to acquire an existing home that is a renovation project of a previously occupied home that was never finished. The funds would be used to purchase and finish the renovation of the house. A 203K cannot be used to purchase a home in a development for example that was never issued an occupancy certificate and that has never been completed (new construction).
12. Can a 203k be used to retrofit my current house for a handicapped family member ?
- Yes, a 203K can be used as a refinance loan to retrofit a home for a handicapped individual.
13. How is the amount of renovation funds determined in a 203K loan ?
- The 203K mortgage calculation is based on the Lesser of the sales price or “as is” current value plus the cost of the renovation. Or it can be 110% of the “after improved” value or future value.
14. If an old home is purchased that must be moved to a new site, can a 203K finance that move and related costs ?
- Yes, a 203K can be used to finance the purchase and transport of a house to a new site and the construction of the foundation at the new site.
15. Can a 203K be used to remove asbestos or mold and water proof a basement ?
- Yes, a 203K can be used for asbestos & mold removal or encapsulation and basement water proofing and flood control devices. Additionally repair of well & septic systems are allowed as well as connection to public water & sewer systems.
16. Is it possible to purchase a HUD home or foreclosed home and rehab it with a 203K ?
- Yes, a 203K can be used to purchase a home sold by HUD and rehab it. A HUD home will require a lead based paint inspection and remediation of it as part of the renovation. Also the purchase and renovation of any foreclosed 1 to 4 unit property is possible with a 203K loan.
17. How is the down payment determined on a 203K purchase and can it be a gift from family ?
- On a 203K the minimum down payment for purchase of a 1 to 4 unit property is 3.50 % on the entire amount. Meaning the purchase price plus the renovation funds and required reserve, etc. A gift from a relative, spouse, domestic partner or very close family friend with a documented history can be a source for the down payment gift as well as funds from the buyer.
18. Is a 203K one loan or two separate loans when purchasing a property ?
- A 203K is always one mortgage loan with the purchase price and renovation funds combined. The renovation funds are held in an escrow account controlled by the lender and released to the borrower and contractor as work proceeds.
19. While rehab is being done on a 203K if more work is needed that was not originally in the plan how can it paid for ?
- All 203K loans have what is called a Contingency Reserve equal to between 10% and 20% of the projected renovation budget. The Reserve is always at least 10% but if any utilities are off in the property then it automatically becomes 15%. In some cases an Underwriter or FHA Consultant may raise the Reserve to 20%. It is out of these funds that any unforeseen work can be funded. If never used the reserve funds are subtracted from the final loan balance at completion. Borrowers can also be repaid for the cost of appliances if purchased with their own funds from any unused portion of the Reserve.
20. Can a 203K loan have a co-signer who will not live in the property ?
- Yes, a 203K borrower may have what is called a Non-Occupant Co-borrower as a co-signer to assist in qualifying for the size mortgage needed.
I hope this post has been helpful and encouraging to those that may have thought a Renovation project was too complex or beyond their ability to manage. My intent is always to inform, educate, and generate discussion. Please call me or email me directly or visit my website for more information on renovation loans. I welcome your comments and questions!