While FHA 203k loans and FHA 203h home loans might be considered as the two most popular FHA home loans right next to the 203(b) loan program, many homebuyers are still unaware of the loans and their features as a disaster relief loan. Otherwise known as a Rehab Loan or FHA disaster relief loan, the program is a mortgage for catastrophe affected homeowners to help finance the house as well as needed repairs.
What Is an FHA 203k Loan?
As mentioned earlier, the FHA 203k loan is one of the loan programs offered by the Federal Housing Administration. The home loan and other such ones like the 203h loans for disaster victims are designed to be FHA disaster relief loans. Consequently, they are made to ease the process of home financing, while ensuring families that have difficulties in getting conventional mortgage loans buy homes of their dream.
The loan is not only a hurricane rehab loan but is also designed to address a common challenge faced by homebuyers – lenders are not approving loans for homes that need repairs. The loan lets homebuyers to buy and fix homes in a single transaction, allowing FHA-approved lending institutions to accept loans relatively quickly.
How does the loan work?
The process of FHA loans is quite similar to regular home buying. However, it comes with a few modifications.
- Apply for a mortgage
- Get Approved
- Get several bids for the job
- Identify the contractor best suited for the job
- Close the loan
- Complete the necessary repairs
- Move in
The FHA-approved lender usually drives the process and guides the borrower throughout the process to ensure that everything goes on smoothly.
The first step of the process is to choose your projects. This is followed by getting a handful of bids for the project. The find and identify the right contractor that you believe will do the right work as required. It is important to ensure that the bids are as accurate as possible as they are subsequently submitted to the appraiser. Once the contractor is selected and is ready to do the project, the next step is to provide all the necessary details to the lender to get the final approval.
The last steps of the process include closing the loan, after which the contractor starts work, and you can move into the home and enjoy, once the work has been completed.
Eligibility for the loan
203k loans are very flexible and help disaster victims and other persons who might find it difficult to qualify for a mortgage. Some of the eligibility requirements are highlighted below.
FICO: the minimum credit scores allowed by the FHA are usually 580. However, some lenders require a minimum score of between 620 and 640 to qualify for the loan. Each lender’s criteria will vary according to their risk tolerance.
Down Payment: a minimum of 3.5 percent down payment is usually required. This is calculated on the purchase price and total cost of the project. The down payment can be received as a gift from family or approved not-for-profit organization.
Debt Payments and Income: Lenders are required to examine the debt-to-income ratio of the borrower. The DTI ratio as it is also called is the comparison of your debt payments and income. It is usually required that not more than 43 percent of your income should go for the settlement of debts and proposed house payment.
Loan amount: The loan limit is dictated by each county where the subject property is located. The borrower can add the cost of rehab to the agreed upon purchase price of the house. However, the total of both the rehab and purchase price cannot exceed the maximum loan limit for such county.
Occupancy: it is a major requirement that you live or at least plan to live in the property you intend buying. Therefore, the loan is not for people that are looking to fix and flip. Nor is it allowed for second homes.
Citizenship: the loan is available to all citizens of the United States and lawful permanent residents.
What can the loan do for you?
203k loans are basically of two types – 203k streamline and 203k standard. The choice of loan usually depends on the severity of the repairs to be done on the home.
This loan option is designed for non-structural and non-luxury renovations. The loan program is more of a “cosmetic improvement” loan that doesn’t require major reconstruction or repair. This includes minor repairs in the kitchens and bathrooms such as roof replacement, painting, carpet and flooring, appliance replacement, energy-efficient improvements and repairing safety and health issues amongst others. A 203k Streamline can be used for repairs and rehab of up to $35,000 and one bid per contractor.
The 203k standard loan option covers all kinds of renovation and repair works except non-permanent changes or the addition of luxury amenities. Structural alterations, larger landscaping projects, improving accessibility for disabled persons, and moving the house to a different site are some of the works that can be done with this loan option. A standard 203k loan program allows a loan amount up to 110% of the after improvement value as determined by the appraisal report, as long as the total loan amount doesn’t exceed the maximum loan limit dictated by the county where the property is located.
Downsides to the loan
The benefits of 203k loans cannot be denied or over-emphasized. However, these loans also come with some disadvantages. One of such inconveniences is securing reputable contractors and ensuring they complete the paperwork.
Another downside to the loans is deciding on the upgrades without going above your budget. It is also worth noting that the loan usually takes more time to process compared to a standard loan.
While 203k loans might come with some inconveniences, the benefits associated with them far outweigh the downsides. Therefore, it is advised for those in need of Houston rehab loans, especially victims of disasters to go for the 203(k) loan and get their homes back in shape.