Chad Smith couldn’t have been happier with his new home in Southern California. It faced the glorious San Gabriel Mountains. A canopy of alders shaded his street and his backyard backed up to an elementary school and Little League baseball field, giving him and his children access to their own field of dreams.
What he hadn’t figured on — nor did his real estate agent disclose the potential bombardment — were all those foul balls harmlessly drifting over his backyard fence season after season, peppering and cracking his roof tiles and causing hundreds of dollars in damage over the years. Worse still, whenever it rained, water seeped through the broken tiles and into the attic before saturating and staining the ceiling and buckling the wood floors in his home office.
With no money for repairs, he resorted to spreading a blue tarp over his roof at the first sign of inclement weather. Then he heard about the Federal Housing Association’s (FHA) 203(k) home loan program. Essentially, the program provides home buyers the money to both purchase and fix up their home with one loan or in Chad’s case to refinance his current home loan so that it will cover both his mortgage and the cost of his anticipated roof repairs. Unlike securing a home equity line of credit (HELOC), which requires that the homeowner have a certain amount of equity, the 203(k) has no such equity demands.
“The intent of the program has always been to encourage and promote neighborhood revitalization, especially in those areas sorely in need of rehabilitation,” said Ian Carnochan, a lender with Prospect Mortgage in Rancho Cucamonga, Calif. “But the truth is, you can use it for a variety of purposes, from total tear downs — as long as you leave the original foundation — to simple renovations. We’re doing more every day because of its flexibility and easy entry point, whether you’re doing a purchase or refi.” Take a look at current rates below.
One loan covers not only the cost of the property but also the cost of necessary home repairs, signed off by your lender. So, for example, if the home’s purchase price were $100,000 and the projected upgrades, repairs and improvements totaled $15,000, the loan amount would be $115,000. The loan amount covers a maximum of 110 percent of the after fix-up appraised value. FHA loan limits vary by market, but can go up to $729,570 for a single property. To check the current loan limits by county, go to entp.hud.gov.
How to obtain an FHA loan
While FHA loans makes an eminent good sense for all kinds of repairs and renovations, borrowers have to meet both the government’s and their private lender’s layers of rules for obtaining one — a path that will require both patience and persistence. Your first step should be to make sure what you want to fix or improve complies with the FHA’s approved list of repairs. Fortunately, the list is expansive, ranging from energy efficient upgrades to kitchen and bath remodels to new decks, patios and porches. Sorry, no new spas or pools, but an in-house whirlpool bath would probably be acceptable. You could also use money to repair an existing pool.
Next, you need to find an FHA-approved 203(k) lender and agent knowledgeable with the FHA 203(k) loan process. Not every mortgage lender provides 203(k) loans because of the specialization, bureaucracy and additional paperwork involved. As for loan approval, if you can qualify for an FHA-insured loan, where the debt-to-income (DTI) ratios are more relaxed than non-government-insured loans, you’ll likely qualify for a 203(k). The FHA, however, excludes investors from participating in the program because the agency wants borrowers to actually live in the homes they’re repairing.
The types of properties that qualify for 203(k) loans are also quite liberal. One-to-four unit dwellings, such as single-family detached homes, duplexes, triplexes, 4-plexes, condominiums (with certain restrictions) and even mixed-used residential buildings (the home, not the retail business), all qualify.
Now for the stickier parts of the process. Even if you’re loan-worthy and your property is eligible, there’s the actual rehab work that needs to be done.
Not for amateurs
First, you need to know that there are actually two kinds of 203(k) loans: the full FHA 203(k) loan and the Streamline FHA 203(k) loan.
The Full 203(k) is for larger projects requiring more than $35,000 in costs or for projects that require structural repairs. Also, the borrower has to work with a Housing and Urban Development (HUD) inspector, another layer of protection for both the lender and borrower to ensure the project stays on task and on budget.
The Streamline 203(k) is for repairs and improvements less than $35,000, none of which can be applied to structural costs. Because the improvements are regarded as cosmetic, no HUD consultant is required.
You can do the repairs and renovations yourself, subject to your lender’s approval, but you must be skilled, licensed and able to meet your lender’s scheduled completion date. However, any money you save as a do-it-yourselfer can only go toward the cost of materials, never for labor. Any saved money will go into an escrow account to cover cost overruns, additional improvements or reduce the balance on your loan.
More likely, lender-approved contractors and subcontractors will perform the work and face the same tight schedules. Either way, each stated repair has to be thoroughly detailed. To ensure the work is being done, an inspector will frequently visit your home to monitor your project. Projects must be completed within six months. Only when each phase of the work is completed to the lender’s satisfaction are the workers paid through an established escrow account, similar to how funds are disbursed with a construction loan with the lender typically withholding 10 percent to cover an unforeseen mechanic’s liens.
Weighing the merits
Because the 203(k) loan rolls repair costs and the purchase or refinance into one loan, it is extremely convenient for many borrowers. Add that to the fact qualifying guidelines are more accomodating than non-government-insured loans, the 203(k) again can make a lot of sense for budget-minded rehabbers.
Conversely, owing to government red tape, closing on a 203(k) can take from 60 to 90 days, longer than with conventional loans. Interest rates also can be slightly higher because of the higher-risk home improvement and construction aspects involved.
Finally, if you live by a Little League park or golf course and your roof has been similarly pelted by white, wayward, rounded missiles, you might consider weighing the merits of using an FHA loan to repair the roof and launch a host of other repairs (broken windows, perhaps).
But please, after talking to your certified 203(k) lender about whether you would be the right fit for such a loan, also schedule a meeting with your city about raising raising the safety net separating your home from the field of play.