How to Get the Best Mortgage Series – Week 7

Welcome back to my series on securing the best mortgage for your unique financial situation and goals. This week, I’m diving into a fantastic loan option that lets you buy and renovate a home with a single, affordable mortgage. If you’ve ever fallen in love with a fixer-upper, this one’s for you!

Why Consider a 203(k) Loan?

Imagine finding a home in the perfect location, but it needs a little—or a lot—of work. Don’t cross it off your list just yet! Whether you’re dreaming of a major renovation or a few cosmetic upgrades, the FHA 203(k) loan can help you finance both the purchase and the renovation costs in one manageable package. Even current homeowners can refinance and renovate with this loan.

Types of 203(k) Loans

There are two types of 203(k) loans to consider:

• Standard 203(k): Ideal for larger projects.
• Limited 203(k): Perfect for renovations costing $35,000 or less.

What’s the Cost?

Here’s a simple breakdown:

• Total acquisition cost = sales price + total renovation cost.
• Your mortgage is based on this total acquisition cost.
• The loan cannot exceed 110% of the after-improved value of the home.
• The required down payment is 3.5% of the total acquisition cost.

Additional charges include a 10-20% contingency reserve, inspection fees, title updates, permits, and consultant fees. After closing, renovation funds are held in escrow and released as work is completed. Any leftover funds reduce the principal balance.

Eligible Homes

You can buy a single-family home, townhome, condo (FHA approved), duplex, or even a four-family dwelling if you plan to convert it to a single-family home. Just make sure the home is more than a year old.

Eligible Repairs

The 203(k) loan covers a wide range of repairs, from major jobs like kitchen remodels and new roofs to cosmetic upgrades like new carpeting and windows. It also covers repairs for termite damage, mold problems, and other safety issues. Energy conservation improvements, such as insulation and energy-efficient appliances, are also eligible.

Timeline – First Things First

Here’s what you need to do:

1. Find an FHA-approved lender: Get prequalified to see how much you can borrow.
2. Interview contractors: Find a reputable business approved by your lender.
3. Make an offer: Allow 45-60 days for settlement to finalize renovation estimates.
4. Meet with a HUD consultant: They’ll write up the job spec and bid request.
5. Provide an itemized list: Include all work to be done with cost estimates.
6. Loan approval and closing: The contractor has 30 days to begin work, with a maximum timeframe of 6 months. A HUD consultant will inspect the work and release funds as needed.

Limited 203(k) Loan for Smaller Projects

The Limited 203(k) is a simplified version for projects under $35,000. It doesn’t require a HUD consultant and has only two fund draws: 50% released 30 days post-settlement and the remainder after final inspection.

Is a 203(k) Loan Right for You?

A 203(k) loan can make your dream home a reality with less cash upfront. If you think this loan might be a good fit for you, reach out to me for more information and recommendations for lenders who specialize in these types of loans.

Ready to transform that fixer-upper into your dream home? Let’s get started! If you’d like to have a friendly conversation about your options for buying a home, feel free to set up a time to chat with me. I’m here to help you every step of the way.