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Renovation Loans

Ruben Garcia Mortgage Group - Renovation Loan

What’s a Renovation loan, Who Can Apply, and How does it Work?

One of the most common and highly used type of renovations loan is the FHA 203k.
This loan allows you to borrow money, using only one loan, for both home improvement and a home purchase (so you get one fixed rate with one total monthly payment). These loans can also be used just for home improvements, but there might be better options available. 203k loans are guaranteed by the FHA, which means lenders take less risk when offering this loan. As a result, it’s easier to get approved (especially with a lower interest rate) and not the best credit.
Ruben Garcia Mortgage Group - Renovation Loan

What’s a Renovation loan, Who Can Apply, and How does it Work?

One of the most common and highly used type of renovations loan is the FHA 203k.
This loan allows you to borrow money, using only one loan, for both home improvement and a home purchase (so you get one fixed rate with one total monthly payment). These loans can also be used just for home improvements, but there might be better options available. 203k loans are guaranteed by the FHA, which means lenders take less risk when offering this loan. As a result, it’s easier to get approved (especially with a lower interest rate) and not the best credit.

FHA 203k Basics

Some properties are almost perfect – the location is good, and the property has potential, but significant improvements need to be made. I’ve always preached, you can always fix a home a lot faster than you can fix a neighborhood. It is better to fall in love with the location of the home first and then the home.

FHA 203k makes it possible for you to turn that property into a home. You are taking that property off the market and making it a valuable part of the community again. One of the great advantages is that more often than not the buyer of a renovation home is getting a pretty good deal on it. By the time the home is repaired there’s a good chance that some equity has been built.

Fund repairs and purchase:

You can borrow enough to make your purchase plus enough to make the necessary improvements. Because the Federal Housing Authority (FHA) is involved, lenders are willing to move forward with a property they otherwise wouldn’t touch. This is a huge plus!

Project overview:

Your project must be completed within six months. Funds are placed in an escrow account and paid out to contractors as the work is completed. It’s essential to work with reputable contractors who don’t underbid and who are familiar with the 203k process. Make sure you do your homework on the contractors, that they research the entire scope of the work to make sure you are getting an accurate bid.

Eligibility:

Owner/occupants and nonprofit organizations can use FHA 203k, but not investors. The program is designed for one to four unit properties, but condo and townhome owners can use the program for interior projects. You don’t need perfect credit – because the FHA protects lenders in case you default, it’s easier to qualify. You still need sufficient income to cover the payments. Typically you want your debt to income ratio to be at or below 43%, however there are cases in which an FHA loan can get approved at a higher debt to income ratio.

Loan Details

You must borrow at least $5,000, and there are maximum limits set by the FHA that vary by location. For most people buying a single-family home that is not extravagant, you’ll fall within these limits. For smaller projects, the Limited FHA 203k (previously under the name Streamline 203k) allows you to borrow less with an easier process. Make sure that you speak.

Interest rate:

The interest rate will vary, depending on rates in general and your credit. The interest rates move directly with the market, so make sure you are constantly checking rates until the moment that you lock in your loan.  Lenders need to do extra work tracking the progress of your project and handling payouts. At the same time, the loan is insured by the FHA, so lenders might offer a lower rate than you’d get elsewhere. Compare offers and get the loan that works best for you. 203k loans can be either ​fixed-rate or variable rate loans with repayment up to 30 years.

Down payment:

With the 203k loan, like other FHA loans, you can pay as little as 3.5 percent up front. However, there are good reasons for making a larger down payment whenever you can.

Contractors and DIY

203k loans give you the opportunity to make significant improvements to your home. You also get to do the things that matter most to you: if you want to use green or energy-efficient appliances and materials, you’re free to do so. You can’t fund luxury items through 203k, but you can make dramatic improvements.

Unfortunately, you’re generally not allowed to do the work yourself. Even if you are a skilled, licensed contractor, don’t expect to handle all of the work. Why? There are many reasons that lenders avoid this.

You must use licensed contractors for all work, and it’s important that they know you’re using 203k. This might rule out certain handymen you’ve used in the past with whom you have developed a relationship. Why? Responsibility and insurance. Handymen don’t really have to stick around and complete the work. Moreover, handymen are not licensed and in most states they are capped on how much they can charge for any given project. For example in California a handyman can’t do a job that will cost more than $500.00. The 203k process is all about paperwork and following certain rules, so brace yourself for less freedom than you might have imagined when remodeling your home.

So how does it all work? What does the road map look like?

The process is like that of regular home buying, with some modifications:

Apply for the loan → Get Approved → Find A Contractor → Get Multiple Bids →
Close the loan → Complete Repairs → Move in (yes it’s that simple)

Receiving a final approval involves lining up contractors and receiving bids, and some additional “hoops” to jump through. Don’t get stressed at this process, though. The 203k lender will drive the process and guide you through. You’re not on your own! We are always just one call away. Its not as complicated as it may sound.

Choose your projects:

The first step is deciding which repairs you want to do (see “What Kind of Repairs Can I Do?” below). The lender will require any safety or health hazards to be addressed first – things like mold, broken windows, lead-based paint, and missing handrails.

From there, choose which cosmetic items you want to take care of. For instance, say you want to replace appliances, add granite in the kitchen, and gut the bathroom. Those are all acceptable projects for the loan.

Choose your contractors:

Once you’ve got your project list together, find contractors. The contractors must be licensed and insured, and typically have to be in full-time business. You can’t use buddies who do construction on the side, and you typically can’t do the work yourself unless you’re a contractor by profession (and even then some lenders will have restrictions).

Best results will come from super-experienced and professional remodeling firms that have done at least one 203k renovation in the past. Your lender may already have some contacts that he/she can suggest as well as an experienced Realtor. Remember: your entire project can be held up by one contractor that is unwilling to complete the necessary forms.

Get your bids in:

Once your contractor is “on board” with helping you complete your loan, get official bids. Make sure the bids aren’t “guesses.” They must be completely accurate. The reason is that the lender will submit final bids to the appraiser, who builds the value of the work into the future value of the property, upon which your loan is based.

Changing bid dollar amounts later could incur additional appraisal costs and trigger re-approval with the lender. Again, make sure your contractor knows all this! This is why its so important to work with a contractor that’s familiar with 203k renovation loans.

Submit everything to the lender:

By this point, the lender will have your income, asset, and credit report information. Once it has all the required bid paperwork, your loan can go to “final approval.” All the documents will be reviewed by underwriting and if everything’s in order you will get a final loan approval.

Close the loan:

You will sign final closing documents. Typically this is done at an escrow office which is usually chosen by the seller.

Let the Work Begin:

Once the loan is finalized, the contractors can start the work. Depending on the extent of the repairs, you may be able to move in at the same time. There is nothing that says that you have to wait until the work is complete before you move in so don’t feel that you have to wait.

For bigger projects, arrange to live somewhere else until work is complete. You can finance up to six months of payments into your loan amount to allow room in your budget to do so. This is a huge plus if you have some extensive work being done.

Move In And Enjoy:

The work is complete, and you’re the owner of a beautiful new home. You’ve probably built a ton of equity in a short time, and you didn’t have to engage in a bidding war to buy your ideal home. This is definitely a win, win situation!

Hey! What’s Today’s Rate?

Today's Rate

$

20%

1%

4.375%

$
$

$1421

Monthly Payment

Principal & Interest $1421

Monthly Taxes $1421

Monthly HOA $1421

Monthly Insurance $1421

Want more information on renovation loans?

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