In a recent column we discussed the challenge that first-timer homebuyers face in accumulating funds to purchase and fix up a home. One of the suggested solutions was FHA’s 203(k) loan that provides the cash to purchase and rehabilitate a property all in one loan.
The 203(k) loan also contains a less complicated "streamline" version that can assist not only buyers but also existing homeowners who want to stay in their homes but lack the extra cash for minor repairs, new cabinets and appliances.
While the conventional 203(k) has been around for more than three decades, the streamline came on the scene five years ago. At that time, the U.S. Department of Housing and Urban Development had many homes in its inventory that needed a cosmetic overhaul before interested buyers would make an offer to buy them.
The agency discovered that when a borrower could no longer make loan payments, he or she often did not spend the time and money to maintain the home.
The streamline was introduced as an incentive for consumers to buy HUD foreclosures — it allows for simple repairs that can be easily estimated and completed. It offered homebuyers an additional $35,000 that they could add on to their mortgage to improve or upgrade their home.
HUD then made the streamline available to existing owners who wanted to refinance and improve their homes.
The streamline differs from the conventional 203(k) loan in some ways. The streamline may not be used for any structural repairs, has no minimum borrowing amount, and does not require a general contractor even though they are often used.
And, while the streamline does not require a professional consultant, the lender is responsible for ensuring that the repair cost is reasonable and customary for the area in which the property is located.
Here is a list of improvements that are ineligible for financing with a Streamlined 203(k) loan:
- Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;
- New construction (including room additions);
- Repair of structural damage;
- Repairs requiring detailed drawings or architectural exhibits;
- Landscaping or similar "site amenity" improvements;
- Any repair or improvement requiring a work schedule longer than three (3) months or rehabilitation activities that require more than two (2) payments per specialized contractor;
- Improvements that require a plan reviewer;
- Improvements that result in work not starting within 30 days after loan closing or cause the owner to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted. (FHA anticipates that, in a typical case, the borrower would be able to occupy the property after the loan closes.)
Cash-back refinances are not permitted, and existing owners must be able to show that they have occupied the home for the previous 12 months. There are some specialized guidelines and loan-to-value rules, but all standard FHA criteria apply regarding credit, income and asset documentation.
Unlike the conventional 203(k), which calls for a consultant to monitor the work and see that funds are dispersed as each step of the rehabilitation is finished, the streamline can be completed with just two cash draws — 50 percent for the supplier or contractor to get started and 50 percent upon completion. The total mortgage balance can exceed the purchase price of the property.
Both the conventional FHA 203(k) and Streamlined 203(k) programs were designed to roll all financing into one package. The borrower can take out one mortgage loan, at a long-term fixed or adjustable rate, to finance both the acquisition and the rehabilitation of the property.
The mortgage amount is based on the "as will be" (projected) value of the property and takes into account the cost of the work. The programs allow homeowners to include the cost of the inspection, an origination fee and the cost for a title insurance update.
If you have been postponing needed maintenance and repairs — or have been passing on buying a home that requires fixing up — take the time to research the FHA 203(k) products. They could be solutions to your housing needs and your budget concerns.
Tom Kelly’s book "Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.
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