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While driving through established neighborhoods, it is easy to notice that homes are getting older. Often, these homes sell at a discount or not at all. Older homes offer an opportunity for buyers with the right tools, especially in hot markets. While homes in excellent condition have multiple offers, there is not as much competition among the diamonds in the rough. Thus lies the possibility to buy at a discount and bring the home back to life with a personal touch.
Homes are Aging and Need Renovation
According to a Land Gorilla report, “Much of the available inventory is past its prime; nearly 65% of homes in the U.S. are over 25 years old, and many need updates, renovations, or repairs.” That is a staggering figure! Although, if you think about it, a 25-year-old house was built in 1994. There are a lot of outdated homes built in the 1990s and before. Picture the wallpaper, ready to be replaced roofs, old plumbing fixtures, ugly siding, and small closets. Plus, don’t forget the outdated kitchens and bathrooms. All the more reason for our popular renovation loan products!
During practically every home search, a buyer and their agent encounter a home in need of repair or remodeling. Either the buyer dreams of what could be, or they run out of fear of it not working out. The dreamers look for opportunity and ask something like, what if this kitchen or bathroom could be updated? Unfortunately, most feel the need to pass on these outdated or broken down homes because of the lender and appraisal property condition requirements.
So, what happens to the buyer with dreams of finding a home with the right bones in the desired neighborhood? Well, some decide to transform their desired home just like the pros on HGTV. If this is something you’ve contemplated, a renovation loan, such as the FHA 203k loan might be something to consider.
203k Gives Buyers an Advantage
Sadly, too many buyers move onto the next home, but what if a mortgage lender could combine flexible lending guidelines with the ability to include the funds to make renovations or repairs in the loan? Luckily, the FHA 203k purchase renovation loan exists to accomplish this goal. Yet, too often it flies under the radar. And at OVM Financial, we want to bring this renovation solution to the forefront and help buyers achieve their dreams.
FHA has several ways to fund repairs or renovations. From the lowest cost level to highest, there is the FHA loan with escrow repairs. Additionally, there are two classifications of the renovation loan: 203k limited and 203k standard. The FHA loan with a repair escrow typically tops out at appraiser required repairs up to $5,000.
So, let’s discuss the 203k renovation products. The FHA 203k Limited covers smaller, non-structural home improvements, while FHA 203k Standard handles structural and larger renovation jobs. Although both include the more lenient qualification guidelines FHA has become known for, there are big differences between the two. So, let’s explain the differences.
What is an FHA 203k Limited Renovation Loan?
Formerly called an FHA 203k Streamline, it is now called a 203k Limited program. Although allowed renovation costs cap out at $35,000, the benefits are aplenty. Most renovation projects fall into this category. As mentioned, the 203k Limited will not allow structural improvements along with other certain limitations. A cool feature of the 203k includes the ability to borrow 110% of the appraised value! Think of this situation. An appraisal comes in low, the seller will not budge, but the buyer wants the property. Just change over to an FHA 203k loan and add the desired improvement. If 110% of the value is enough to cover the price difference and the improvement, problem solved!
Renovations Allowed on 203k Limited Loans
- Kitchen & bath remodels
- Repairing or removing a pool
- Mold remediation
A good rule of thumb is, as long as walls are not being moved, a 203k Limited usually works.
Once, improvement costs cross the $35,000 threshold or are structural; the 203k Standard is the best option.
What is an FHA 203k Standard Loan?
As we’ve discussed, the 203k Limited program allows smaller and non-structural home improvements. Once the total renovation cost exceeds $35,000 or structural renovations are involved, an FHA 203k Standard loan is required. The only difference between the two is that a lender approved HUD Consultant requires an inspection. Like the 203k Limited, borrowing 110% of the appraised value could save the day too.
Examples of renovations allowed for standard 203k but not 203k limited are listed below.
Allowed Renovations for a 203k Standard Loan
- Home addition
- Garage or carport addition
- Teardowns (at least a portion of the prior foundation must exist)
- Foundation repairs
An additional feature of the 203k Standard loan includes the ability to finance mortgage payments. Especially on larger rehab projects, a homeowner may have to live elsewhere during the improvements. So, FHA may allow financing for some payments.
Furthermore, 203k Standard loans require another person within the process called a HUD consultant. A HUD consultant is pretty much a project leader and facilitator between the buyer/homeowner, lender, and appraiser. Their responsibility includes reviewing the work, determining renovation requirements, and ensuring safety.
Even though the 203k Standard loan is used for more extensive improvements, it may also include any of the nonstructural items allowed by the limited version.
Download Our Renovation Comparison Chart
Our comparison chart helps to compare the multiple options and requirements for each type of renovation loan. Complete the following information and we’ll deliver the chart to your inbox.