FHA 203(k) Rehabilitation Loans
Sometimes It Pays to Refinance
When we picture buying a home, it's easy to assume that the house is new and in great condition. However, that's not always the case. Many buyers decide to purchase a home that is significantly older, and not in the best condition. There could be a number of reasons for this kind of buy; the buyer is looking for a fixer-upper, the list price is affordable, etc.
Securing a mortgage for such a property wasn't always easy; the entire process could be very costly, with improvement loans that had high interest rates, short repayment terms, and balloon payments. With the FHA 203(k) Rehabilitation Loan, that's no longer the case. This mortgage product enables borrowers to finance the purchase or refinance of a home, along with its renovation or "rehabilitation" of their existing home. A Rehab Loan benefits borrowers, as well as lenders, since it insures a single, long term loan--whether its a fixed-rate or ARM-- that covers the purchase/refinance and renovation of a home.
The FHA's 203(k) program is also a good option in cases of federally declared natural disasters that cause property damage or destruction. Borrowers can use a rehab loan in such situations, to finance the necessary renovations.
Advantages of a Rehab Refinance
There are a number of advantages to refinancing with the FHA 203(k) Rehabilitation Loan. With the FHA Rehab Loan, you have the option to refinance your property and create your own home equity with repairs and upgrades. This 203(k) allows you to buy an older house at a low price (and great interest rates). You are then able to renovate your home according to your own needs and style, while simultaneously increasing equity with the new improvements.
Additionally, the FHA 203(k) loan is a convenient way to purchase or refinance your home, without having a high credit score, making a large down payment, or having high interest rates. As with all FHA mortgage products, your home loan is insured, which allows for more leniency than a conventional loan. While section 203(k) insured loans save borrowers time and money, they also benefit the lender by allowing them to have the loan insured, even though the property has not yet been renovated, and the condition and value of the house may not yet offer adequate security.
Eligible Rehabilitation Activities
There are limitations and restrictions on the amount, types, and costs of rehabilitation covered under the FHA 203(k) Rehabilitation Loan, which range from relatively minor expenses, to virtual reconstruction of the property. For example, the cost of renovation must be at least $5,000. Whereas on the high end, a property that has been demolished or will be razed as part of rehabilitation is eligible under 203(k), provided that the existing foundation remains in place.
According to the US Department of Housing and Urban Development, the types of rehabilitation that borrowers may make using Section 203(k) financing include:
- Structural alterations and reconstruction
- Modernization and improvements to the home's function
- Elimination of health and safety hazards
- Changes that improve appearance and eliminate obsolescence
- Reconditioning or replacing plumbing; installing a well and/or septic system
- Adding or replacing roofing, gutters, and downspouts
- Adding or replacing floors and/or floor treatments
- Major landscape work and site improvements
- Enhancing accessibility for a disabled person
- Making energy conservation improvements
HUD also requires that properties financed under this program meet certain basic energy efficiency and structural standards.
FHA Refinance Options for Homeowners
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FHA Loan Articles and Mortgage News
December 15, 2018 - Do you qualify for a low down payment option on a new home purchase? Do you already own a home and have a mortgage but want to refinance? FHA mortgage loans offer these choices to house hunters and home owners alike regardless of whether you have owned property before or not.
December 7, 2018 - Why do people refinance their mortgage loans? There are many reasons, but for those who prefer to do their financial planning with an eye on the future, refinancing can be a tool to eliminate certain kinds of debt, get a lower mortgage rate, or pull equity out of your home in cash.
December 5, 2018 - When you purchase a home with an FHA mortgage, are you already contemplating when you might sell or refinance? It may sound premature to some, but for those who prefer long-term financial planning a strategy for home ownership makes sense.
November 27, 2018 - Remember, it’s better to take longer to prepare for your refinance if you need to in order to fix things like payment history (a recommended 12 months of on-time payments for all bills) or correct identity theft issues on a credit report.
November 20, 2018 - Do you know what to expect when you want to pull value out of your home in cash? Is there a difference between cash-out refinance loans in Texas and New York? How much money will you get in cash? These and other questions are important to answer in advance.
FHA.com Reviews
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