2325 E. Camelback Road #100
Phoenix, AZ 85016
Arizona's #1 FHA Lender (2014)
NMLS #221602 | FIMC NMLS #2289
FHA 203k Renovation Financing is a product offered by FHA that allows a home buyer to finance in the costs of repairs and renovations for a home purchase. Often times we find homes for sale that are beat up or missing vital components to the house that are required to be fixed or in the home before you can close and this is where a FHA 203K is valuable. Even if the home does not require any repairs to be made you can still use the FHA 203k Renovation loan to cosmetically upgrade your home. Love the house but hate those green counter tops and blue carpet, why not finance the cost of replacement into your home so you don’t have to come out of pocket for all of these things? The key is that the home has to appraise with the repair costs so a good Realtor will be needed to help you comp out the home so you have an idea of how much room you have to include these repairs/upgrades. Here are some helpful facts and steps to financing a home FHA 203k financing:
1). It is an FHA Loan: 3.5% Down Payment based on the Purchase Price + Total Renovation Cost is allowed
i.e. Contract Purchase Price = $100,000 and total renovation costs $25,000 then your Net Purchase Price would be $125,000 and your 3.5% Down Payment would be $4,375
2). The appraisal is done before the work is done on the house. So if the purchase price is $100,000 and there are $25,000 worth of renovation costs then the appraisal must come in at $125,000. Appraisal is done with the contract purchase price and the contractors bid and HUD Inspector’s report.
3). A HUD Inspector must inspect the property with a licensed contractor to go over what MUST be done to the home to pass FHA inspection and what the customary costs should be for the work that must be done. After those costs are assessed, then the borrower can explore what they desire to be done the home. Keep in mind that whatever work they desire to do, it needs to add value to the home. As a real estate agent, you know what adds the most value to the home (Kitchen, Bathrooms, Floors, etc.) The upgrades need to be customary for the neighborhood.Landscaping is not something that is generally allowed to be added to renovation costs unless there is work that must be done to pass FHA inspection.
4). A Licensed Contractor must do the work to the home. Handy man or work to be done by the actual buyer of the home is SERIOUSLY DISCOURAGED. If the work is not done to the satisfaction of the appraiser when the final inspection is performed on the property then we could have a very serious problem. If the work is done by a licensed contractor and was not done to satisfaction then you have some legal recourse to have the work be done to satisfaction at cost to the contractor.
5). Interest Rates are usually .25% higher than a regular FHA purchase.
6). Qualification guidelines are much stricter for the 203k program. DTI requirements are 29/45. Normal FHA purchases are 45/57.
7). Out of pocket costs are more for 203k because you have to pay the HUD inspector and appraiser outside of closing and more work is required by them so the costs are higher. Actual costs are going to be different depending on the scope of work, square footage, etc.
8). Work begins after closing/funding and the contractor is paid draws as he finishes different phases of construction. He is paid by the title company and draw fees are assessed to the borrower (usually $100 per draw to the contractor). A final inspection is administered by the appraiser after the work is completed.
9). Please allow for AT LEAST 45 days for COE. 60 is comfortable. As you can tell this is a great program but is a fairly extensive process so we need to allow for enough time
For more information or an instant pre-qualification, please contact me or my team!