There is a kind of FHA mortgage that first-time home buyers and experienced home owners alike can apply for that will allow the purchase or refinance of a piece of owner-occupied real estate and provide funds for repairs and renovations.
The loan comes in two forms, as mentioned above; one for a new purchase and one to refinance an existing mortgage.
The FHA 203(k) Rehabilitation Mortgage and the FHA 203(k) Refinance loan offer a range of possibilities for those who wish to buy a fixer-upper house or renovate their existing property.
FHA loan rules in HUD 4000.1 describe these loans as follows:
The Section 203(k) Rehabilitation Mortgage Insurance is used to:
- Rehabilitate an existing one- to four-unit Structure, which will be used primarily for residential purposes;
- Rehabilitate such a Structure and refinance the outstanding indebtedness on the Structure and the Real Property on which the Structure is located; or
- Purchase and rehabilitate the Structure and purchase the Real Property on which the Structure is located.
This rehab loan comes as a “standard” version and a “limited” version, and the choice you make will depend greatly on the scale and scope of your project.
- The Standard FHA 203(k) mortgage may be used for remodeling and repairs with a minimum repair cost of $5,000. You are required to use a 203(k) Consultant.
- The FHA Limited 203(k) may only be used for minor remodeling and non-structural repairs and you are not required to use a 203(k) Consultant. Your total rehabilitation cost must not exceed $35,000 but there is no minimum.
The FHA loan rules for this type of mortgage requires the home to be an “existing construction” home that has been completed for at least a year before the rehab loan is applied for.
Using an FHA Rehab loan to buy a fixer-upper is permitted under HUD 4000.1, which states, “A Property that is not eligible for a 203(b) Mortgage due to health and safety or security issues may be eligible under 203(k) if the rehabilitation or repair work performed will correct such issues.”
Which type of FHA Rehab loan is right for you? Talk to a participating FHA lender about your options under this program and see what may be right for you. Don’t forget to ask about how much it will cost to use a 203(k) consultant where required.