The FHA Renovation Mortgage
There is a great product that Poli Mortgage offers and it is called the FHA Streamline 203-k renovation mortgage. It is more or less a traditional FHA mortgage and a home improvement loan rolled into one simple mortgage. One of the only First Time Home Buyer Renovation Mortgages available today.
At Poli Mortgage we call the program the Repair and Restore Home Loan.
The Repair and Restore loan at Poli Mortgage will work well for a purchase and for a refinance transaction.
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The FHA R&R program features fixed rates, typically a non-FHA construction loan will be either variable or significantly higher than market rates, requiring a second closing in order to achieve a permanent mortgage.
The FHA R&R program is a “one time close”and there is no need to refinance when the work is done. It is your permanent fixed rate mortgage.
The FHA Renovation Mortgage example as a purchase:
Purchase Price: $150,000
Cost of repairs and soft costs: $32,000*
Total Purchase + Rehab: $182,000
Completed Value: $195,000
Your down payment will be roughly 3.5% of the Total Purchase + Rehab, in this case it would be approximately $6,370.
$182,000 – $6,370 = $175,630 Mortgage Balance
With a completed value of $195,000 you could have nearly $20,000 in equity in your home.
As you can see, a renovation mortgage is a great way to build equity almost immediately in a home that you are able to buy at a bargain price.
This is an especially great product in 2012, with many homes on the market that are difficult to finance due to poor property condition and deferred maintenance.
Use a Renovation Loan to Buy a Foreclosure
For example, if a disgruntled homeowner that is on the verge of losing their home to foreclosure decides to vacate the premises. On the way out they wind up taking with them the furnace, water heater and some or all of the copper plumbing (this does happen) and they leave a few other surprises lying around.
The lender will have a difficult time selling this REO Property, the lender rarely, if ever, will invest money in the property when this occurs. This is a good thing for you, as you can buy a property at big discounts to market.
Most situations are less drastic than the one described above, there many great properties on the market, in great neighborhoods, that are in need of a little “TLC”. Many traditional sellers are not willing to invest renovation money in a property they’re trying to sell either.
However, it is important to note that the property can be in perfect condition as well, it doesn’t need to be run down in order to qualify for a FHA Renovation Mortgage.
You can simply invest the renovation funds to home improvements that fit your tastes, as long as the “as completed value” is within FHA guidelines.
FHA Renovation Basics
The 203K purchase process works as follows: An interested buyer goes to an approved FHA 203K renovation lender and obtains a pre-approval letter based on the threshold they qualify for based on income and down payment.
Once they locate a property they are interested in purchasing, they engage a home improvement contractor. Estimates are submitted by general contractors for both labor and materials.
A special 203K appraisal is then performed to determine the value of the property “as is” and “as completed”.
There is also an added layer of protection for you. FHA requires that a Consultant that is specifically designated by HUD as a “203K Inspector” be involved with the project.
This is a lender assigned consultant with many years of experience in the home construction and renovation business that will oversee the project, to protect both the interests of yourself and those of the lender and FHA insurance.
These are mandatory. They are there to ensure that costs are within reason, quality of materials are up to code and to be sure the project stays on schedule.
The work itself happens after closing, and needs to be performed by a licensed general contractor with their own lines of credit and references. Contractors are evaluated by FHA to determine if they are likely to complete the work.
Reputable contractors will not have any problem being approved by HUD while, a contractor with a bad reputation or questionable history with HUD will not.
There are checkpoints in the project where the contractors are paid out “draws” by the title company or lawyer who closed the original loan. Only partially draws are paid out during construction, to help ensure that the contractor will complete the project on time and on budget.
What Happens to Leftover Money?
There are extra funds included in the loan calculation, these are called contingency reserves. Any funds that are left over when the renovation portion is complete, will go to pay down the principal of the mortgage, as opposed to going back to the borrower in cash.
Are Home Improvement Loans Difficult to Qualify For?
Remember, this is a Federal Housing Administration mortgage, therefore credit requirements are somewhat relaxed, rates are excellent and the down payment is much smaller than you may be used to.
The guidelines for FHA Underwriting are very flexible and it is likely that you won’t have any problem qualifying for a renovation loan as a first time home buyer or as a refinance.
Poli Mortgage Group is a Direct Endorsed FHA Mortgage Lender with in-house underwriting and fast turn around times. We have full back office support for renovation loans and we will move you through the sometimes overwhelming process with care and precision. We’ll be there every step of the way.
Rates. Integrity. Service.
*Examples are hypothetical, all loans will have different costs associated with them based on customer requirements. There is no way of knowing exactly how much equity will be built via home improvements.