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FHA Fixer-Upper Loans For Smaller Home Improvement Projects

FHA Rehab Loans

There is a type of FHA home loan that lets you get a mortgage to simultaneously buy and repair or modify a home. These fixer-upper mortgages are known as FHA 203(k) Rehabilitation Mortgages and this is an option you can also get as an FHA refinance loan. It’s a great alternative to the standard FHA home loan.

Any borrower needing to repair, upgrade, or renovate an existing home can apply for this mortgage–you can refinance an FHA or non FHA loan with the FHA 203(k). But some borrowers don’t have ambitious, large-scale work to be done and a “full” 203(k) rehab loan might not be the right loan if you don’t have a huge project to deal with.

And fortunately there is a smaller version of the FHA 203(k) Rehabilitation Mortgage or Refinance loan that lets you borrow the right amount of money needed for your improvement projects

The FHA Limited 203(k) Rehab Loan And Refinance Loan

The type of loan you need to apply for when you want to do smaller rehab or remodeling projects is called the Limited FHA 203(k).

What does this loan do? It allows borrowers to apply for rehab loan funds, but for the Limited version, the loan features a maximum total repair cost limit of $35,000. There is no repair cost minimum.

The Scoop On “Limited”

The word “limited” in the loan’s name does not just refer to the amount of money you can apply for. These loans are not intended for “major repairs” or “major remodeling” work. If any of the following applies to your remodeling or rehab project, it is not eligible for an FHA Limited 203(k) Rehab Loan:

The repair or improvements are expected to require more than six months to complete, your rehabilitation activities require more than two payments per specialized contractor, the required repairs arising from the appraisal necessitate a Consultant to develop a specification of repairs/Work Write-Up; or require plans or architectural exhibits.

Those are not the only limitations, you will need to ask your loan officer what else may apply, but in general Limited 203(k) loan proceeds also cannot be used to do any of the following:

–Converting a one-family Structure to a two-, three- or four-family Structure;
–Decreasing an existing multi-unit Structure to a one- to four-family Structure;
–Reconstructing a Structure that has been or will be demolished;
-Repairing, reconstructing or elevating an existing foundation;
-Purchasing an existing Structure on another site and moving it onto a new foundation;
-Making structural alterations such as the repair of structural damage and New Construction, including room additions;

The above is not a complete list, but it gives you a very good idea of what is not possible with a Limited 203(k). For any such major renovation work, the standard 203(k) would be required.

Examples Of Repairs/Renovations Possible With A Limited FHA 203(k) Rehab Loan

You can use Limited 203(k) funds to eliminate health and safety hazards that would violate HUD’s minimum standards, funds can be used to repair or replace wells and/or septic systems, and you can use this loan money to get your home connected to public utilities. You can also repair or replace certain mechanical systems in the home, make changes for improved functions and modernization, and do roof repair.

Talk to a loan officer to discuss your specific needs. You may find that an FHA rehab loan is right for you, but the size of that loan is something you should ask the lender about if you are not sure.

Joe Wallace - Staff Writer

By Joe Wallace

November 27, 2020

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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