FHA 203K
29 Dec

Rehab Loans With FHA Guidelines

If you are a borrower who is interested in a property that could use some work or are looking into purchasing a distressed property from a foreclosure or short sale, then an FHA 203K might be the right loan program for you.  Even though there are a lot of lenders that aren’t in favor a rehab loans, the FHA is still there for you if you intend on rehabbing a home with the intention on living in the home.  This is a main requirement for the FHA 203K loan program in that it is only for owner-occupied homes and home flipping is strictly forbidden.

FHA 203K: Guidelines

As with all other loan programs out there, the FHA 203K loans have their own set of guidelines that need to be followed if you are hoping on getting a loan approval.

  1. FHA 203K FICO credit score requirements is at least 580, just as if you were looking to get approved for a standard 3.5% down payment FHA Loan.  If you compare these requirements with Conventional Loans by Fannie Mae, you may be required to have a 700+ FICO credit score to even be considered for a construction loan.  This is exactly why the FHA 203K is a great program to work with.
  2. Down Payment requirements for FHA 203K loans is similar to standard FHA Loans in the fact you only need a 3.5% down payment in order to obtain this loan type.  Down payment is calculated on the home purchase price plus your rehab funds amount.
  3. Home Price $150,000 + Rehab Costs $50,000 = $200,000 Total Cost
  4. 3.5% of $200,000 = $7,000 down payment required.
  5. Debt-to-Income ratio for this program mimics FHA Guidelines where you can have a maximum ratio of 56.9% which includes all monthly debts plus your proposed housing debt versus your monthly gross income.
  6. Maximum Loan Amount for a FHA 203K Loan is up to 110% of the proposed home’s value after the rehab has been completed.

Which Projects Are Covered?

If you were wondering, the rehab funds must be used for specific tasks and even if there is money left-over after the projects are complete, you are not entitled to this money.  Most repairs will be covered under this loan except for non-permanent repairs or high-end luxury items. Covered repairs include the following:

–          Structural repairs or adjustments

–          Converting a home into a multi-unit home or converting a multi-unit home into a single family dwelling.

–          New Roofing

–          Typical Kitchen or Bathroom Remodels

FHA 203K Timeline

There is definitely a sequence of events needed in order to facilitate an FHA 203K Loan and these steps need to be followed carefully to ensure proper execution of the loan program.

  1. Apply for the FHA 203K Loan program and ensure you have the proper FICO credit score, down payment, debt-to-income ratio, etc.
  2. Receive approval for your FHA 203K Loan
  3. Determine the projects you are looking to get accomplished under this program.
  4. Go through the bidding process with multiple contractors to ensure you are getting the service and proper pricing for the repairs needed.
  5. Finalize your projects and submit these bids to your lender
  6. If approved, you will receive final approval for the entire project’s amount and the loan will be funded.
  7. The seller of the home will get their funds, while your rehab funds will be located in an escrow account and will be released to the contractors upon completion of the work.
  8. Once all work is completed, feel free to move in and enjoy your home.

As you can see, the FHA 203K loan is a great opportunity for those borrowers who are looking to purchase a home that could use some work to make it what is truly desired.  This is also an attractive option for borrowers who want to live in a desired neighborhood but cannot purchase fully remodeled homes and the only option might be a distressed property.  If this program is appealing to you, then you need to reach out to us at Mortgage Scenarios where we can get this program started for you.

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