What to Know About FHA Rehabilitation Loans
One important thing to know about FHA Rehabilitation Mortgages is that there are two types: one type is the rehab loan you get when you simply want to buy and repair a house, an FHA 203(k) Rehabilitation Mortgage. These loans can be used either as purchase loans or to refinance and repair a property.
The other is for those who need to repair a home that has been damaged in a federally-declared disaster area. These loans can also be used to replace the home or finance the renovation of the existing structure.
These loans are known as FHA 203(h) loans. Those who need an FHA 203(h) loan should know that these disaster relief loans can be used in conjunction with the other FHA Rehabilitation loan, the FHA 203(k). It can also be used with FHA’s Energy Efficient Mortgage add-on.
FHA Rehab Loan Funds
No matter which type of FHA Rehabilitation Mortgage you choose, you must work with the lender to use your loan funds properly. Money from these mortgages does not go to the buyer but rather is placed in escrow and disbursed to the contractors doing the work or to suppliers who provide the raw materials.
You won’t have the option to use excess funds to buy appliances or other furnishings; all FHA 203(k) and FHA 203(h) Rehabilitation loan funds must be used for specific purposes agreed upon by you and the lender.
Two “Sizes” Of Rehab Loans
Depending on how ambitious your project is, you may need to choose between a standard 203(k) loan and a Limited 203(k) option. No work on load-bearing walls can be done with the limited version, and in both cases (limited or standard), you must use the loan funds only on approved rehab projects.
The Standard FHA 203(k) loan has a minimum repair cost of $5000, while the limited version has no minimum.
Some options can’t be paid for with FHA loan funds. These options are considered luxury items like adding a swimming pool or a barbecue pit, and the FHA will not fund their installation.
How do you learn the value of the home after the rehab work is complete? The FHA and HUD say the total value of the property “must still fall within the FHA mortgage limit for the area” after the work is done.
“The value of the property is determined by either... the value of the property before rehabilitation plus the cost of rehabilitation or... 110 percent of the appraised value of the property after rehabilitation,” but the FHA adds a caveat--whichever is less will be considered the appraised value of the home once the 203k work is complete.
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