Although it isn’t widely promoted, a federally insured loan program referred to as the FHA 203K may just be your gateway to getting that home improvement undertaking over with. It’s also a method to aid in streamlining the process so that borrowers don’t spend more time talking to lending companies than they are to actual architects and contractors.
Now, what exactly is an FHA 203K loan?
An FHA 203k loan is an integrated mortgage loan and a remodeling loan in one that’s issued by mortgage lending firms and backed up by the Federal Housing Administration. Some people may ask why the government can be so generous, but if you take a step back, it’s not exactly about generosity as it is about the bigger, global landscape and the U.S. economy.
Via the Housing and Urban Development and the Federal Housing Administration 203k program, the government is concerned mainly about maintaining entire neighborhoods and communities and making sure that the country’s stock of existing homes do not implode. Despite that, many still personally benefit from these larger-encompassing motives. One of the biggest perks one gets from the FHA 203k program is that it bridges the gap of insufficient equity needed by homeowners of newly bought houses.
Purchasing a home that demands renovating and having to secure funds for it at the same can be horrific considering expenses. Borrowers first need to build up equity in the home before they can even take on another loan on top of it. In a nutshell, equity is established by paying off principal on the loan all while the home gains in value, and this may take time.
Currently, there are two FHA construction loan variants: the 203k Standard and the 203k Streamline. Here are how they differ:
The Streamline 203k is capped at $35,000 in construction work and demands for less documentation and paperwork in terms of approval. These can be considered minor operations done in the house in that they are mostly for fixing and improving existing parts of the houses as opposed to adding new structures. On the other hand, the Standard FHA 203k loan is not capped and may call for much more extensive paperwork, as the level of construction involved in this sub-loan type calls for bigger improvements. Examples can range from adding bathrooms and bedrooms and changing a home’s entire floor plan.
Moving forward, another key difference between both 203k programs is that the Streamline 203k calls for the house to be habitable all throughout the renovation period, whereas the 203k can allow for the borrowers to temporarily move out to give way to massive construction. That said, borrowers who resort to the Standard 203k loan can add up to half a year of mortgage payments to their construction loan for the entire period in which the home is unlivable.
Another feature that sets both of them apart is that with Streamline 203k loans, payments can be taken care of in two terms: the initial payment can be made at the beginning of the project (which basically means 50% of the agreed cost) and then the second payment can be made during the project’s finale.
If you’re curious to know what the rehab loan requirements are, click the link!