Homebuyers buying foreclosed or older homes are often frustrated by the challenges of securing financing needed for repairs and renovations. But a Federal Housing Administration home loan program offers some help.
A Section 203(k) loan gives borrowers the ability to cover the cost of repairs and improvements into a single mortgage. The 203(k) loan benefits homeowners who either cannot or do not want to use their home equity.
No major structural repairs are allowed with a Streamline 203(k), such as putting on a new addition or fixing a cracked foundation, however repairs pertaining to the roof, plumbing and even add an attached garage are.
Full 203(k) loans primary function allow almost any home improvement as long as it adds value to the home. Rehabilitation and repair projects include remodeling a kitchen, structural additions or finishing a basement.
Two Loans, For Two Different Needs
There are two types of 203(k) loans. The more common of the two loans is known as a Streamline 203(k). It is limited to repairs or improvements totaling $35,000 or less.
The second type of 203(k) loan applies to improvements costing more than $35,000.
While 203(k) loans can be a great alternative to borrowers who struggle to secure other sources for financing, they do come with restrictions.
203(k) loans may be used for refinancing, but are limited to owner/occupants. Investors are not eligible.
Work must begin within 30 days of closing and be completed within six months. If the borrower is a qualified contractor, they cannot be paid for anything outside the cost of materials. If a contractor is being used, be sure to ask if they understand and agree to the payment schedule and requirements.
Upon completion of work, the loan borrower provides a letter and a HUD-approved cost consultant conducts an evaluation.