The Federal Housing Administration (FHA) Section 203(k) program enables homebuyers to finance both the acquisition and repair costs together in one mortgage. For example, if you are able to purchase a home “as is” for $150,000 and it will cost $50,000 for renovations, you can obtain a mortgage for $200,000.
How it works. First, you and the property seller agree on the “as is” price. Next, you’ll need to obtain a detailed cost estimate from a licensed contractor and provide this document to your mortgage lender. They will have an appraiser provide an estimated property value based on the work to be completed. This is called an “as-completed” value.
Your lender will hold the renovation funds (e.g. $50,000) in an escrow account, and disbursements are made to the contractor as key phases of work are completed. There is no limit to the level of construction. In fact, you can obtain an FHA 203(k) on a “tear-down” property purchase. The maximum loan amount is the same as the FHA loan limits. Nationwide limits for 1-family homes this year are $314,827. With a renovation mortgage, you only need the minimum down payment of 3.5%.
FHA Limited 203(k)
The Limited 203(k) program works the same way, but with fewer steps and less paperwork, as long as the repair costs are $35,000 or less. The lender’s appraiser must provide an “as-completed” valuation.
Everything you need to know about construction loans, conventional and government renovation loans, and “construction-permanent” loans are explained in Housing Finance 2020. Some programs include a “Do It Yourself” option where the homebuyer can do some of the work.
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