Got your eye on a fixer-upper or a foreclosure home? A Federal Housing Administration home loan program can help buy the place and give it a makeover, too.
An FHA-insured Section 203(k) loan allows borrowers to lump the cost of repairs and improvements into their mortgage.
Benefits for homebuyers and homeowners
“We’ve seen tremendous growth in the use of these loans across the country, especially in areas where the housing stock is old and needs repairs or when people are buying foreclosures and short sales,” says Stephen Adamo, former president of Weichert Financial Services and now the head of U.S. home loans at Santander Bank.
The 203(k) loan also offers solid refinance rates for cash-strapped homeowners who either cannot or do not want to tap their home equity.
Limited vs. standard 203(k) mortgage
There are two types of 203(k) loans.
A streamlined or limited 203(k) has an easier application process, and the repairs or improvements must total $35,000 or less.
The standard 203(k) requires additional paperwork and applies to improvements costing more than $35,000.
Either type of 203(k) loan requires a minimum of $5,000 to be spent on rehabilitation of the home. Generally, the maximum mortgage amount is the lowest of:
The FHA’s maximum mortgage limit for the area.
A calculation involving the home’s “before” value plus improvement costs.
A calculation involving the home’s “after” value, including the improvement.