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FHA 203(k) Rehab Mortgage

FHA 203(k) is a unique type of mortgage that enables home buyers to finance the purchase of a house and the cost of its rehabilitation through a single mortgage.

When buying a house that needs repair or modernizing (fixer upper), home buyers usually have to follow a complicated and costly process. The interim acquisition and improvement loans often have relatively high interest rates, short repayment terms and a balloon payment. However, the FHA 203(k) offers a solution that helps borrowers and lenders, insuring a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property. FHA 203(k) insured loans save borrowers time and money. They also protect the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequate security.

The FHA 203(k) insures mortgages covering the purchase and rehabilitation of a home that is at least a year old. The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either (i) the value of the property before rehabilitation plus the cost of rehabilitation, or (ii) 110 percent of the appraised value of the property after rehabilitation, whichever is less.

Lenders may charge some additional fees, such as a supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehabilitation plan, and a higher appraisal fee than the regular FHA mortgage loan.

Properties Eligible for Mortgage Loan
The extent of the rehabilitation covered by FHA 203(k) insurance may range from the exceeding $5,000 in cost to virtual reconstruction. A home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. FHA 203(k) insured loans can finance the rehabilitation of the residential portion of a property that also has non residential uses, they can also cover the conversion of a property of any size to a 1 to 4 unit property. The types of improvements that borrowers may make using FHA 203(k) financing include:

  • structural alterations and reconstruction
  • making energy conservation improvements
  • adding or replacing floors and/or floor treatments
  • enhancing accessibility for a disabled person
  • major landscape work and site improvements
  • modernization and improvements to the home’s function
  • elimination of health and safety hazards
  • changes that improve appearance and eliminate obsolescence
  • adding or replacing roofing, gutters, and downspouts
  • reconditioning or replacing plumbing; installing a well and/or septic system

HUD requires that properties financed under this program meet certain basic energy efficiency and structural standards.

Limited FHA 203(k) Mortgage

FHA’s Limited (formerly known as streamline) 203(k) program allows home buyers to finance up to $35,000 into their mortgage to repair, improve, or upgrade the property. Home buyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an FHA appraiser. Home buyers can make their new home move in ready by remodeling the kitchen, painting the interior or purchasing new carpet.

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Application:
Applications must be submitted through an FHA approved lender.

When you are ready to apply for a loan, it will be easier for you and the lender to have these things ready.

Loan Checklist:

  • Address to your place of residence (past two years)
  • Social Security numbers
  • Names and location of your employers (past two years)
  • Gross monthly salary at your current job(s)
  • Pertinent information for all checking and savings accounts
  • Pertinent information for all open loans
  • Complete information for other real estate you own
  • Approximate value of all personal property
  • Certificate of Eligibility and DD-214 (for veterans only)
  • Current check stubs and your W-2 forms (past two years)
  • Personal tax returns (past two years), current income statement and business balance sheet for self-employed individuals

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FHA Mortgage Loan: Is this for me?

The FHA (Federal Housing Administration) was created in 1934, and insures loans provided by FHA approved lenders. FHA insures loans on single family and multi-family homes in the United States. FHA insured loans require private mortgage insurance (PMI) to protect lenders against losses that result from defaults on home mortgages.

Can I qualify for a Mortgage with my Credit Score?

April 7, 2017 – Everyone wants to know if their FICO score is high enough to qualify for an FHA mortgage. Is it possible to qualify for an FHA loan with credit scores from 500 to 579?  YES. FICO scores between 500 and 579 may technically qualify for an FHA loan at the higher down payment requirement because those borrowers are considered high risk. But most lenders will require FICO scores in the mid-600s. The “500-579 rule” is only an FHA minimum.

When looking into an FHA Loan it is important to understand that FHA minimum standards and participating lender requirements are not the same. Participating FHA lenders may have higher standards than FHA loan minimums, and this is permitted as long as those standards are applied in accordance with the law.

Depending on your FICO scores, you may be eligible for more competitive interest rates and and lower down payments than applicants who come to the FHA loan process with “marginal” credit scores. You may be able to adapt credit related “best practices” to help make you a more attractive FHA loan applicant, but it takes time to work on your credit habits and establish patterns of reliability.

Lender standards will determine what interest rates are available for a certain range of credit scores, and which applicants may be required to make higher down payments because of those “marginal” scores.

Under the rules found in HUD 4000.1, the FHA single family home loan rule book for both new purchase and refinance loans, borrowers with credit scores at 580 or higher are technically eligible for maximum financing for FHA home loans. These borrowers will be required to make a minimum cash investment of a 3.5% down payment. For those with credit scores between 500 and 579 10% down is required according to HUD 4000.1.

Some loan applicants mistakenly believe that if it’s written down in the FHA loan rule book, the rule must be enforced. Lender standards, state law, or other factors may have a say in how the transaction is to be carried out in addition to these minimums.

When you are ready to apply for a loan, it will be easier for you and the lender to have these things ready.

Loan Checklist:

  • Address to your place of residence (past two years)
  • Social Security numbers
  • Names and location of your employers (past two years)
  • Gross monthly salary at your current job(s)
  • Pertinent information for all checking and savings accounts
  • Pertinent information for all open loans
  • Complete information for other real estate you own
  • Approximate value of all personal property
  • Certificate of Eligibility and DD-214 (for veterans only)
  • Current check stubs and your W-2 forms (past two years)
  • Personal tax returns (past two years), current income statement and business balance sheet for self-employed individuals

You will need to pay for a credit report and an appraisal of the property you have an executed contract on.

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