Here in the Greater Boston area the real estate market is red hot and moving fast. The current market is creating unprecedentedly low housing inventory. Inventory is scarce for many buyers, leaving buyers wondering when the next potential house will come along that suites their needs. This makes an FHA 203k Rehab loan a very viable option.
Regardless of the market, a rehab loan in MA is available to most borrowers to access money to do necessary repairs or renovations to a home you just purchased or to refinance and fund renovations of a home you already own.
FHA 203k Rehab loans have been around since the 90’s. An FHA rehab loan could potentially open up more inventory for homebuyers to consider in a market with tight inventory. Homes that may be a good fit but need to much work may now be a consideration.
With an FHA Rehab Loan, the property will be appraised on the future value of the home with the repairs and renovations that are to be completed.
What is an FHA 203K Rehab Loan?
A 203k Rehab Loan is backed by the Federal Housing Authority and it allows a homeowner to combine the purchase of a home and renovation costs all into one loan. A 203k Rehab loan is also referred to as a renovation or rehab loan and can also be used to refinance a property and borrow money for renovation purposes.
The great part of the 203k Rehab Loan is you still only need a 3.5% down payment or minimum equity. While the rehab loan does allow for a low down payment it does require a slightly higher credit score than a regular FHA loan. A Massachusetts borrower with bad credit may not be eligible for the rehab mortgage. Most lenders will be looking for a minimum of a 620 to 640 credit score.
You also benefit from the lightened criteria of an FHA Loan such as a 100% of the down payment can be gift funds as well as other less stringent underwriting criteria.
Another caveat of the rehab loan is that all work must be performed by the appropriate licensed professional. In most cases, you cannot receive the funds and do the work yourself.
The FHA offers two different rehab loans. The Limited 203k Rehab and the 203k Rehab.
The Limited 203K Rehab Loan
The Limited 203k was formerly known as the 203k Streamlined loan. It is designed for minor repairs, updates and alteration of no more than $35,000.
A Limited 203k Rehab loan is streamlined because you don’t have to have a 203k Consultant overseeing the project and much less paperwork is needed compared to the full 203k. There is no minimum rehab amount and it can be used on a single family home, a multi family home or a condo (owner occupied). One thing not included in the streamline is anything that requires structural work.
What Repairs Might Be Included in The Limited Rehab Loan?
- Gutter replacement or repair
- Furnace and/or AC repair or replacement
- Upgrade major systems like plumbing or electrical
- Upgrade flooring like carpet, laminate or hardwoods.
- Minor renovations of kitchens and bath
- Painting, both exterior and interior
- New windows and doors
- New appliances
- Disabled accessibility
- Lead paint or asbestos abatement
- Radon Mitigation
- Repair or replace decks, patios or porches
- Basement finishing
- Waterproofing
- Residing your home with vinyl or wood siding
- Replacement or repair of septic system or hook up to town sewer
- and more….
The 203K Rehab Loan
The 203k Rehab Loan is for work requiring over $35,000 or any work requiring structural alteration or repair. The full 203k Rehab Loan does have a minimum draw of $5,000.
The full 203k rehab loan also requires hiring a 203k consultant that reviews and oversees the project to verify the feasibility and to keep the project on track. The cost of the consultant is variable depending on the cost of the renovation work.
The full 203k does require more administration and paperwork than the limited but does allow for much larger projects.
Of course you can use the money from the full 203K to do all of the work you can with the limited but you can also now use the funds to make structural repairs and add on to the house as well. In addition, you can borrow up to 6 months of mortgage payments as the work is being done.
Things You Can’t Do With A 203k Rehab Loan
- Install a swimming pool. Though you may be able to repair an already existing pool with rehab funds, but you cannot do a new installation of a swimming pool.
- Rehab or build an outbuilding. Any work done needs to be attached to the primary structure. So if an outbuilding needs work or you wanted a detached garage or workshop a rehab loan would not work.
- You cannot use rehab funds for any installation of landscaping.
- Furniture or accessories cannot be bought with rehab funds.
Role Of The FHA 203K Consultant
Homebuyers using the full 203k loan must work closely with a HUD accepted 203k consultant.
An initial site visit will be planned so the consultant can get a scope of the work you would like to complete on your home and the feasibility of the project. If he agrees the work is feasible you enter a contract with the consultant. And, as mention earlier there is a fee paid to the consultant based on the size of the project.
From there the consultant will prepare a detailed document including architectural renderings and detailed cost estimates and submit to the borrower, lender and contractors.
Contractor choice is absolutely yours but they do need to be approved by the consultant and abide by the FHA guidelines. Once your package is submitted and approved you can close on your home and get started on the work.
The consultant will do site visits to make sure certain work is complete before the contractors are paid, as well as prepare a final punch list to complete the project.
This link will provide a list of 203k Consultants in Massachusetts.
Pros and Cons Of An FHA 203k Rehab Loan
There are a lot of benefits to the FHA 203k Rehab loan, but some downsides as well.
Pros of an FHA 203K
- No equity needed in the home
- 3.5% minimum down payment
- One loan for purchase and repairs
- Mortgage is assumable
Cons of an FHA 203K
- Homeowners can’t do their own work
- Contractors must be lender approved
- Not available to investors
- More paperwork work than a regular mortgage
Summary
An FHA 203k may open up possibilities for you when searching for a home. Now you know there can be money available to do those repairs and upgrades on home.
When you get your mortgage pre-approval talk with your lender about the possibility of a rehab loan so if the right house comes up you are prepared with the right pre-approval.
This year alone I had a buyer who used a limited FHA loan to hook a failed septic up to town sewer and replace flooring and another buyer who used it to replace faulty siding on an otherwise perfect home. In both cases, the FHA Rehab Loan made the purchase possible for each home buyer on houses that otherwise needed to much work for them.
If you are willing to consider a rehab loan for a home that needs all the wallpaper stripped and a complete paint job, or the home that has a roof and furnace on there last leg can now become a possibility.
Also if you are considering a rehab loan in Massachusetts check out the MassHousing Mortgage with Rehabilitation mortgage program.
Other resources:
Paul Sian Buying a Fixxer Upper
Petra Norris DIY MIstakes When Buying a Fixxer Upper
Karen Highland Hiring a Painting Contractor
Anita Clark Building a Realtionship With Your General Contractor
Bill Gassett How to Tell If You Need A New Roof
Federal Housing Authority (FHA) 203k Mortgage Insurance
FHA 203K Rehab Loan- What Your need to Know is written by Kevin Vitali of EXIT Group One Real Estate. If you would like to sell your home or buy a new home give me a call at 978-360-0422 and let’s get the process started.
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