The FHA 203-k Rehab Mortgage Program.
In the past, buying a home and then fixing it up, typically required a down payment and a reserve amount of cash after closing to do the renovations. Today, a borrower can use the FHA 203-k Rehab Loan to buy property or refinance an existing mortgage, and obtain funds for renovations in the same transaction. We call it our Poli Mortgage Group’s "Repair and Restore Home Loan".
A rehab loan enables a borrower to obtain enough money to buy the home or refinance the mortgage and provides the additional funds to make renovations.
A rehab loan is a great way to build equity in a home quickly. An appraisal is completed before and after the work to indicate the value "as is" and "as completed". Once the work is completed, you may have instant equity, and you may even be able to take additional cash out of the equity after the required seasoning period. The process works in three easy phases:
- At closing, the seller or previous lender receives all monies due. A predetermined "set aside" amount is placed into escrow from which the borrower can draw to pay each contractor when the work is completed.
- Upon completion of each stage, an inspector visits the property to verify completion of the work, and to authorize the release of money from escrow to pay that contractor.
- Your contractor will be able to be paid up-front for materials and a small portion of the labor. The balance of the contractor's fee is then held until the release is authorized by the inspector. This protects you from the risk of unfinished work.
The renovation funds can be used for virtually any home improvement cost, but it is important to note you are required to hire professionally licensed, third party contractors to handle all the bidding and work. Each contractor must be on our “approved contractor list” or be eligible to qualify. The program does not allow you to be your own contractor.
Rehab loan limits are set by the FHA for each county, and your down payment for a purchase and renovation loan is generally calculated at 3.5% of the total loan amount (including closing costs). All of our FHA programs carry a 30 year fixed interest rate and the rates for a rehab loan are very similar to a traditional FHA mortgage with a very small add-on rate to cover the added risk.
The FHA does allow for a streamline rehab refinance as well, which is a simple refinance transaction that does not require re-verification of your information, and utilizes market interest rates with little or no closing costs.
To qualify for a rehab loan, the FHA requires your property be “Owner Occupied”, although both single family and multi-family (2-4 family) residences are eligible. For combined purchase and renovation loans, the entire transaction will close at once (aka "One Time Close"), meaning you will not be required to re-close during the loan draw period or after the work is completed. Poli Mortgage Group offers rehab mortgage loans in all the states we serve and have a team who is standing by and ready to guide you through the process from application to project completion. Just call us direct at 781.801.1400 to speak to a rehab loan professional or complete our web inquiry form.