Trying to find the money to buy a home and make renovations to it can be frustrating. After all, many lenders won't approve a mortgage for more than the home is worth, and if they do, the money usually comes with stipulations like requiring you to use a certain contractor for the remodeling.
But there is a way that your mortgage can pay for your home renovations – without all of the extra rules!
It's called a 203K loan, and it is a product from the Federal Housing Administration (FHA) that permits borrowers to finance not only the price of their home, but also the cost of needed repairs or renovations.
How does it work?
Simply put, this type of mortgage allows you to borrow against the future equity of your expanded home. As a result, many lenders consider it to be the best kept secret in the mortgage business. The mortgage can be taken out for 110% of value of the home, once all of the repairs are completed. Like all other mortgages, the interest rate for a 203K loan fluctuates, but it is usually under 4% (at least, these days!)
So, how do you get your hands on one?
To qualify for this type of loan, borrowers must have a minimum credit score of 640, and one thing to keep in mind is that closing costs are usually higher on these loans than on traditional mortgages because of the extra home inspections that are involved for approval.
Mortgage experts say the most important step in the process is finding a lender who has experience with this type of loan. There is certain paperwork that they must fill out, so it's crucial that they know what they're doing.
The 203K loan is available to buyers who are purchasing a home and to those who want to refinance an existing mortgage. The term for this type of mortgage is usually 30 years, and there are other stipulations that must be followed, but none that are outrageous or unreasonable. They simply require that you hire a licensed contractor to do the reconstruction work, and all of the work must be completed within six months.
The FHA has created those two requirements in order to make sure that all repairs and renovations are completed in a timely manner. After all, the sooner the repairs are done, the faster they can insure the loan. Remember, they’re basing everything on the home's value after the renovations are complete.
If you're concerned about finding the right contractor, don't worry. Lenders who offer this type of loan have an accreditation program for contractors who do the work, so just ask them for the list. That way, your contractor will know exactly what is expected of him, the FHA and your lender will know that the work will be completed on time, and you can relax knowing that the work is being done by a qualified professional.
Like all FHA programs, there is a lot of paperwork associated with this type of loan, but a lender who has experience with a 203K loan will make sure that every form on the checklist is filled out and submitted properly.
As far as payment goes, your contractor will be paid as the work is completed, and inspections will be done throughout the renovation process. The thought here is that by releasing the money to the builders once certain benchmarks are met, instead of them receiving 100% payment up front, homeowners can rest assured that the remodeling will be completed sooner rather than later.
If you'd like information on the 203K loan program, visit the U.S. Department of Housing and Urban Development's website at portal.hud.gov.
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