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Understanding the 203K Rehab Loan

By Malcolm Rivers

203K Basics

The 203K rehab loan is different than other types of loans. 203K loans are loans provided by the Federal Housing Administration to encourage buyers, and the lenders who provide the capital to those buyers, to purchase homes which may have increased risks for both the buyers and the lenders. In many low income communities, federal programs have been created which prioritize greater home ownership and the renovation of these homes, hence the purpose of this program. This type of loan is directed toward houses which have considerable structural and/or cosmetic damage. The loan covers the cost of the property, necessary repairs, and provides a low down payment requirement and much less stringent criteria for potential borrowers than conventional loans.

Applying for and Using a 203K

The process of applying for, and using, a 203K loan consists of 6 major steps.

  • Step one: A prospective buyer finds a property that fits the criteria and makes an offer to purchase that property. Using a professional, well versed in the mortgages of this type, can assist in this process and that professional should be involved even at this early stage of the process.
  • Step two: A buyer meets with a FHA approved plan consultant. Meeting with a plan consultant is important in providing an analysis of the property. The plan consultant begins the process by looking at the property to assess what kinds of renovations need to be made to bring the property up to code and provide the outcome that the home buyer envisions and if the plans are worth the potential costs.
  • Step three: The buyer begins by starting the application process. The home buyer should work with a loan officer to assess possible credit issues and keep track of documentation. A Work Write Up is given by the plan consultant to the loan officer and a final number is provided to help determine the final mortgage application amount for appraisal.
  • Step four: The application is processed and closed. The mortgage application process continues as normal and the lender looks at the credit scores, income, assets and the like for the potential buyer.
  • Step five: The proceeds of the loan are distributed. Once the loan is closed the fund from the mortgage will be used to pay the seller of the property and begin an account for the renovation efforts so that construction can begin. A time frame is established for the renovations by the plan consultant and funds become available as construction goes on and the work is monitored and approved.
  • Step six: Work is completed and the final inspection is conducted. When the work has been successfully completed, the buyers sends a letter for final inspection and as long as the inspector is satisfied, a final draw occurs and any monies left in the account will be used to pay back the principal.

Properties that Qualify

There are requirements for 203K loans which determine the types of properties which are eligible for them. More specifically, there are two types of 203K loans for which two types of homes are qualified: streamlined and regular. Regular 203K loans are designed for homes that need structural repairs. Streamlined 203K loans are reserved for properties with non-structural damage. Homeowners must live in the prospective houses and the houses must be at least a year old, contain up to four families, can be of mixed use or have a need to be moved to another set of foundations at a new location to be eligible. The types of eligible repairs include, but aren't limited to; disability access, bathroom remodeling, room additions, roofing and flooring, siding, energy conservation.

The 203K renovation mortgage is a specialized loan with some specific parameters for the buyer, the lender, the financing and the property. A FHA backed loan, this mortgage arrangement is designed for properties in need of renovation. Use what's written here to assist in your process of obtaining a 203K and, as always, do your own research and do what's best for you and your family. Good luck!

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