FHA 203K Loan – Buy AND renovate a home with one low interest loan!
One of the best kept secrets in home financing! A government program launched in the 1970’s provides an opportunity for many homebuyers who want to take advantage of great deals being offered in the current market – many of them “distressed properties” in need of renovation. The FHA Section 203(k) program is a loan program that allows not only for the purchase, but also the rehabilitation and repair of single family properties and features the following:
* 3½% Down Payment (which can be a gift) * Easier Qualification – Higher Ratios * FHA Loan Limits – Now $729,750 in Orange County! * Must be Owner Occupied (or non-profit) * 1 to 4 Units & Mixed-Use Buildings are candidates * Energy Efficient Mortgage can be added to the total * Two Versions – “Standard” and “Streamlined"
Most mortgages provide only "permanent" financing; a lender will not usually close a loan and release funds unless the condition and value of a property provide adequate loan security. If rehabilitation is involved, a lender typically requires the improvements to be finished before a long-term mortgage is made. So homebuyers wanting to purchase a property in need of repair or modernization, usually have to obtain financing first to purchase the home, and then figure out how to pay for the renovation: a line of credit? – hard to get these days. Credit cards - soaring interest rates!! The Section 203(k) program was designed to address this situation.
A borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and then the rehabilitation of the property through an escrow account. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the labor and materials. Why have most people in these parts never heard of the 203K? FHA insured loans have not played much of a part in funding South OC real estate in recent years. Limitations on loan amounts essentially precluded all but a few OC properties from being a candidate for FHA loans. Four years ago less than 3% of loans here in Orange County were FHA insured; last year with the limit raised to $729,750 about 30% of new loans were FHA insured. Second, as we all know, conventional first mortgages (and lines of credit) were so easy to obtain, few buyers wanted to subject themselves to the demands of the FHA’s requirements.
Yes, when you find that "Diamond in the Rough" that you can visualize tranforming into your ideal home, there are a number of requirements, procedures and timelines involved in order to satisfy the FHA insured lenders and get it approved. FHA approved contractors, appraisers and inspectors must be used and (of course) there are many FHA-required forms to be filled out; it could be daunting without the guidance of someone who understands the process and is teamed with an FHA 203K approved lender. After an extensive training program Brian just earned the "203(K) Specialist" credential with Re-buildUSA, an established and respected company that has brought together the resources necessary to simplify and make sense of over 30 years of FHA rules (and subsequent modifications) for its member Realtors® and their clients.

So how does the 203(K) loan work? In very simplified terms: Pre-qualify with an FHA 203(K) approved lender. Locate a property you want to buy and renovate, and make an offer that is accepted. Obtain preliminary estimates of the cost of renovation from FHA approved consultants and/or contractors (depending the type of 203K loan - "Standard" or "Streamlined"). An appraisal of of the "As Is" condition is performed along with a "Subject To" (the above renovation) +10%. Escrow closes on the purchase of the home and the lender opens a new escrow account to cover the cost of renovations. Renovation work must begin within 30 days and be completed no later than 6 months after close of escrow.