If you are trying to understand and research the FHA Section 203(k) Loan program, chances are, you probably are looking to buy a fixer-upper, as this is one of the primary reasons for wanting an FHA 203k rehab loan. Imperfect homes have become the toast of homebuyers in recent times as they are relatively easy to acquire due to less competition from other people. Such homes also allow buyers to build thousands of dollars in additional equity in a short duration by making minor renovations.
However, it is worth noting that while the benefits of buying a fixer might be tempting, many homebuyers still run away from them due to time and stress involved as compared to purchasing a standard move-in condition home.
Below are some tips and steps involved in getting a 203k renovation loan for your fixer upper if you are ready for the challenge.
What is an FHA 203k loan?
An FHA 203k loan, otherwise known as an FHA Renovation Loan, is a mortgage loan program designed to provide borrowers with the funds needed to finance two items – the house and required repairs to make it habitable. Due to the lending institution’s ability to track and verify repairs, they are more willing to approve loans that they would ordinarily not have considered.
The loan is designed to primarily assess a common problem faced by buyers of fixer homes, which is the reluctance of lenders to approve loans for significant home repairs.
It is required that the home meets certain livability and safety standards. The 203k loan enables you to buy and fix a house using one home loan, with the lending institution being able to approve the loan regardless of its initial condition.
How does the FHA 203k loan work?
The process of the Rehab loan is similar to other FHA loans. However, it comes with slight modifications as highlighted below:
- Get Approved
- Find A Contractor
- Get Bids
- Close the loan
- Complete Repairs
- Move in
Receiving a final approval requires getting contractors and accepting bids for the project, with some additional challenges to overcome. While the process might look stressful, it is worth noting that the lending institution will be available to guide you through the process.
Decide on the repairs you want
The first step of the process is to choose projects you want to be done. The lending institution will usually require that you address any safety and health concerns first, with issues like missing handrails, broken windows, mold, and lead-based paint falling into this category.
The next items to decide on will be cosmetic, which will include replacing appliances, adding granite in the kitchen and remodeling the bathroom.
Choose the contractors
Once you have been able to draw up a list of repairs you want to be done, the next step is to find contractors to handle the job. It is worth noting that one of the primary requirements of a 203k loan is to use licensed and insured contractors that are in full-time business. Since the borrower or homeowner as the case may be cannot handle the job.
Super-experienced and professional remodeling companies are best contacted for such projects, as they are usually familiar with working with a 203k loan. Some quarters have advised that borrowers integrate the 203k paperwork requirements into the agreement, as some contractors can be unwilling to complete the required forms.
Get your bids
At this stage, you have already chosen a contractor that will help in completing your loan. This stage involves getting official bids that are entirely accurate to avoid incurring additional appraisal costs and triggering re-approval with the lender.
Submit every detail to the lender
At this point, the lending institution will have information about your income, asset, and credit report. Once you provide all the necessary bid paperwork, your loan goes to the final approval stage.
Close the loan
The house becomes yours officially as you sign the final documents.
Finalizing the loan means that the contractor can complete the job. The extent of the renovation determines the possibility of moving in. When more significant projects are being done, homeowners usually have to live somewhere else until the job is complete.
Move In and Enjoy
Once the job is done, you become the proud owner of a beautiful new home, and you have probably been able to build a ton of equity in a short time without engaging in a bidding war.
As mentioned earlier, the process might look stressful but thanks to the assistance of your lending institution, you can be sure of having it easy.