FHA 203K Home Renovation Loans

Many Buyers would like to purchase a "fixer-upper" that they believe they can improve into a more valuable property.  However, there are often two problems with this process: 1) If the home's condition is poor (roof leaks, missing flooring, etc.), it may not meet lenders' "complete home" standards or "safety and habitability" requirements.  Who would want to loan on a home with a leaky roof, knowing that continued leaking will cause the home to deteriorate and its value decrease? 2) Most loans allow you to borrow for a home in its current condition -- once you own it, where will the money come from  to make improvements?

Enter the Renovation Loan!

FHA 203K loans are meant to enable a Buyer to borrow the negotiated price of the home in its current condition, as well as the anticipated cost of the improvements the Buyer wishes to make.  The process works like this:

  • Buyers should be pre-approved for an amount sufficient to purchase the home, AND complete the improvements.  When looking for a renovation home, it's a good idea to know your borrowing limits and get rough estimates of what it will take to "fix" the property -- before you write an offer.
  • Once your lender is aware that you want to do a renovation loan, Lender will ask for estimates from licensed contractors showing the exact work and costs of the work Buyers intend to do. This is important, because the lender needs to know that the renovation money will go toward high-quality improvements which will increase the value of the home. The only way your brother/uncle/cousin/friend can do these improvements is if he/she is also a licensed contractor!
  • When the estimates are all complete, Lender will order an appraisal from a firm capable of estimating the home's value once the improvements are completed. If the value is at least as high as what you want to borrow (and you meet other credit criteria), your loan will be approved.
  • At closing, the bank will advance enough money to complete the purchas of the home in its current condition, then will deposit the balance of the loan into an escrow account.  As the work is completed and Lender verifies completion, the Lender will use the rest of your loan to pay contractors.

The Fine Print

  • These loans take longer to process (at LEAST 60 days in most cases), so you should indicate in your purchase contract that you will close in 45-75 days, for instance.  It takes a while to get all the estimates together, present them  to the lender, get lender approval, etc.
  • Lenders may request that your contractors undergo credit checks and other scrutiny to be "approved" by the lender.  If a contractor's record doesn't shine, the lender may refuse to allow that contractor to do the work.
  • The loans take much more effort on  the lender's part, and therefore the interest rate will be slightly higher than what you would pay for another type of loan.  Perhaps half a percentage point higher, but check with a lender before thinking of using a 203K loan.
  • YOU are responsible for working with the contractors to complete the work.  The Lender's only part in this will be to pay the invoices once work has been completed.

Yes, its a little bit of extra effort on your part, as well as the Lender and Realtor.  However, if you're interested in rolling together the cost of a purchase and improvements into one loan, this could be your ticket.  However, since work must be performed by licensed contractors, this isn't the loan for the do-it-yourselfer.  For additional information about other programs which can be used for renovations, or more on the FHA 203K, please contact the Moorhead Team below!

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