Have you been looking for a home, and just can’t find one that is exactly what you want? Or maybe you found a property that needs work, be it a foreclosure or just a house that hasn’t been updated in this century. If this is you, then you should consider the 203(k) program. This program allows you to get one loan which covers the cost of purchasing the property and renovating it. The mortgage amount is based on the appraised value of the property after repairs have been completed. This way, you don’t need to buy the property and hope you can get a second mortgage or home equity loan to complete the repairs. Plus, you have everything set up before closing, and as your 203(k) consultant we are there to help you every step of the way.
Once you find a property you would like to buy, we meet with you at the site and do an examination of the property and the work to be done to determine if the project is feasible.
If it is, we prepare a detailed report which covers the following:
- Project specifications
- Construction cost analysis
- HUD required draw forms
- Contractor bid packages
- Lender required packages
You will then select a contractor. We recommend that you get bids from at least three contractors. Your lender may have a list of pre-approved contractors, which you may want to check out. If you have a contractor in mind that is not approved by your lender, they will need to submit their qualifications to the lender. Each lender does this differently, so make sure you talk to them to find out what is needed.
After the loan closes, the construction funds are put into an escrow account and construction begins.
Throughout the construction process, your consultant will be there to perform draw inspections along the way. These are inspections to make sure the work is being done correctly, and to determine how much should be paid to the contractor for the work that has been done. At the end of the construction, we prepare the final draw, as well as the final lien releases.
There are two types of 203(k) loans. The first, a Limited 203(k), is for repairs between $5,000 and $35,000. The Limited203(k) program is intended to facilitate uncomplicated rehabilitation and/or improvements to a home for which plans, consultants, engineers and/or architects are not required. The Limited (k) program includes the discretionary improvements and/or repairs shown below:
- Repair/replacement of roofs, gutters and downspouts
- Repair/replacement/upgrade of existing HVAC systems
- Repair/replacement/upgrade of plumbing and electrical systems
- Repair/replacement of flooring
- Minor remodeling, such as kitchens, which does not involve structural repairs
- Painting, both exterior and interior
- Weatherization, including storm windows and doors, insulation, weather stripping, etc.
- Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
- Accessibility improvements for persons with disabilities
- Lead-based paint stabilization or abatement of lead-based paint hazards
- Repair/replace/add exterior decks, patios, porches
- Basement finishing and remodeling, which does not involve structural repairs
- Basement waterproofing
- Window and door replacements and exterior wall re-siding
- Septic system and/or well repair or replacement
- Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;
- New construction (including room additions);
- Repair of structural damage;
- Repairs requiring detailed drawings or architectural exhibits;
- Landscaping or similar site amenity improvements;
- Any repair or improvement requiring a work schedule longer than six (6) months; or
- Rehabilitation activities that require more than two (2) payments per specialized contractor.
- Structural repairs and alterations
- Room additions and garages
- Full renovations of kitchens and bath
- Repair and replacement of plumbing, heating, air-conditioning or electrical systems
- Energy conservation improvements
- Installation or repairs on a well or septic system
- Major landscape and site improvements for drainage
- Patios, decks, fencing, driveways, and improvements for accessibility for the handicapped
- Changes for aesthetic appeal and elimination of obsolescence, painting and cosmetic repairs
- New siding, exterior doors, Thermo-pane windows and storm doors
- Replacement of flooring, tile or carpeting
- New appliances
To be eligible, the property must be a one- to four-family dwelling that has been completed for at least one year. The number of units on the site must be acceptable according to the provisions of local zoning requirements. All newly constructed units must be attached to the existing dwelling. Cooperative units are not eligible.
Homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided the existing foundation system remains in place.
In addition to typical home rehabilitation projects, this program can be used to convert a one-family dwelling to a two-, three-, or four-family dwelling. An existing multiunit dwelling could be decreased to a one- to four-family unit.
An existing house (or modular unit) on another site can be moved onto the mortgaged property; however, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation.
A 203(k) mortgage may be originated on a "mixed use" residential property provided: (1) The property has no greater than 25 percent (for a one story building); 33 percent (for a three story building); and 49 percent (for a two story building) of its floor area used for commercial (storefront) purposes; (2) the commercial use will not affect the health and safety of the occupants of the residential property; and (3) the rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.
So, by now you are probably ready to go and wondering what the next step is. For more information on the 203(k) program, you can check out HUD’s website. You can also give us a call at 210-202-1974 and we will go over everything with you and get you on your way to turning the house you like into the home you love.
The Fannie Mae HomeStyle® mortgage is similar to the FHA 203(k) loan, but has different limits on the After Repair Value. These loans can be used on a wider variety of homes though, and they don't have to be owner occupied (One- to four-unit principal residences, one-unit second homes, or one-unit investor properties including units in condos, co-ops, and PUDs. No
manufactured housing.) It can be used for both purchase and refinance loans to renovate a property. Being a type of construction loan, a consultant is still needed for the initial work write-up and draw inspections. Veteran Home Inspections can help you with all of these steps and help guide you through the process.