Fixer-Uppers OK With FHA 203(k) Rehab Loan
You’ve decided it’s time to buy a house. But you can’t afford exactly what you want, and you don’t have a boat load of cash available for renovations. However, you can make your dream possible with the Federal Housing Administration (FHA) 203(k) Rehab Loan.
Purchase And Home Improvement Loan In One
You can buy something that isn’t in tip-top shape, and remodel it to make it perfect inside and out. While most home improvement loans require home equity as security, this program is not a traditional home equity loan.
You can buy a fixer-upper with an FHA 203(k) rehab loan, and finance your desired improvements, too. All with just 3.5 percent down if your credit score is at least 580.
Foundation For Profit
You could buy the worst house on the block and turn it into the best one. Imagine that there’s a foreclosure property that no one will touch because the previous owners broke all the windows, yanked out the furnace, tore up the flooring — you get the idea.
The place could be stunning, and a great investment, if you had the money to buy and fix it up. And maybe you do — with an FHA 203(k) rehab loan.
The home can even be a complete tear-down, as long as there’s a foundation on which a new home can be built.
College Grad Makes Smart Investment
In his early 20s, a young college graduate working at a bank came to Elizabeth Larsen’s loan office to talk about buying a home.
“I had known this man’s Realtor for a long time,” says Larsen, mortgage loan originator at NFM Lending, Palatine, Ill. “The young man wanted a fixer upper. He decided he could buy cheap and make it worth more.”
The three-bedroom property in Aurora, Ill, that the buyer chose had some issues, including two bathrooms that needed updating and an unfinished basement.
How Much Can You Borrow With A 203(k) Loan?
Generally, the maximum FHA 203(k) rehab loan amount is based on the lesser of:
- Purchase price and rehabilitation costs, or
- “As-is” appraised value plus rehabilitation costs, or
- 110 percent of the “after improved” appraised value
Most borrowers make 3.5 percent down payments based on that amount, but some pay more, depending on their credit score, rehab costs and property values.
In this case, Larsen was able to get her client a rehab loan of $225,000, including $65,000 for renovations.
He used the rehab money to add a third bathroom, redo the other two, and completely renovate the basement.
“It’s a feel good story. He was so young, and he put himself in such a great financial place. He was really surprised of how good things worked out for him,” she says.
Equity Lets Homeowner “Trade Up” With Refinance
One year after he took out the rehab loan, the new homeowner came back to Larsen. Because his home had increased in value, he wanted to refinance to a conventional loan.
This buyer had put plenty of time and effort shopping around to get the right remodelers. The good work they did helped him make money from is renovation.
“He now doesn’t have to pay FHA’s mortgage insurance with the new loan,” she said. “He saved money, too, because the interest rates had gone down.”
Often, you can gain instant equity by remodeling — if you choose projects that add more home value than they cost.
“He also wanted a total debt consolidation and put his student loans into the refinance,” Larsen added.
“So, his only debt now is his mortgage. It helps when people take your advice. He was able to come in with all this equity after using the rehab loan.”
Rehab Loan Helped South Florida Buyers Beat Out Investors
Realtor Alexa Rosario works almost exclusively with first-time homebuyers.
“I just closed on an FHA 203(k) loan recently, and absolutely love the program for a few reasons,” says Rosario, agent with Happy Homes Network of Keller Williams Realty in Plantation, Fla.
“Here in South Florida, the average price range is $250,000. Some first-time homebuyers can’t afford to purchase above that, especially if they are single.”
The restrictive guidelines placed on homeowners associations by most lenders make it hard to finance condos in Florida. And there is a lot of competition from investors for lower-priced single-family homes and townhouses.
Diamond In The Rough
But her recent clients, a newlywed couple who had recently graduated from college, were able to go under contract for a bargain $130,000 townhouse that needed a lot of work, said Rosario.
“We had a contractor go out and give us an estimate for the repairs. The repairs were going to cost about $40,000.
I knew that there were similar, updated properties that were selling for $180,000, so I was confident that we could make it work,” she says.
The rehab loan went through for $170,000, and the buyers put 3.5 percent down. The appraisal, closing and repairs loan went without a hitch.
“The buyers moved into the home as if it were brand new and beautifully updated,” Rosario says. “It’s a great program, and I highly recommend it.”
What Are Today’s 203(k) Mortgage Rates?
Rates for the FHA 203(k) rehab loan are about the same as rates for “regular” FHA products, like the 203(b). However, not every FHA-approved lender makes these loans, so you’ll want to check with several lenders and collect a few mortgage quotes to compare.