Streamline 203k Loan: The Right Fit For Many Buyers
Even though the 203k involves a few more leaps and hurdles than the standard FHA loan, it can be a great tool to buy a home that has potential. Dont be scared away by the rules and requirements, because your lending professional should know the ins and outs of the 203k loan.
To be on the safe side, ask your loan officer how many 203k loans he or she has done in the past year, and how many the processing staff has done. Experience on the part of the lender can save a lot of time and headache for the borrower. Find a loan officer who has done 2 or 3 of them in the past year, at least.
With a little help from your lender, and knowing what to expect, you can purchase a home and fix it up per your needs and wants. In a few short months you could be in your fixed-up and touched-up dream home.
Fha Loan For Investment Properties
One of the benefits of an FHA loan is the very low down payment. Meanwhile, investment loans typically have a much higher down payment requirement. Therefore, it would be helpful to many first time investors if you could use an FHA loan for investment properties.
FHA guidelines to not permit borrowers to use an FHA loan for investment properties. However, there are alternative strategies to utilize FHA loans to purchase investment properties without violating the terms of the loan agreement.
What Repairs Can I Do
There are two types of 203k loans. Which one you choose depends on the extent of the repair work.
Limited 203k mortgage
This option allows you to do most cosmetic repair work, including things like kitchens and bathrooms.
The stated limit to costs is $35,000. However, an FHA 203k loan requires a buffer equal to 15 percent of the total bids.
This buffer is called a contingency. Its a just in case fund to cover cost overruns by your contractor. .
So, your real maximum repair costs can be around $31,000.
Most nonstructural, nonluxury items are acceptable:
- Kitchen and bathroom remodels
For more information on the standard vs. limited 203k, see: Should You Choose A Standard Or Limited 203k?
What you cant do with the 203k loan
While FHA 203k guidelines are fairly lenient, there are some things you cannot use the rehab funds for. For example:
- Minor landscaping
- Adding a luxury amenity like a tennis court, barbecue area, or swimming pool
- Projects that will take longer than 6 months
In these cases, other options might be a better fit, such as getting a home equity loan after purchase, or other alternatives mentioned in the next section.
What If I Dont Have Cash
Heres the good news for investors out there who want to take advantage of this scenario but dont have enough capital to purchase with cash. The FHA 203k refinance has the same title seasoning requirement if you purchase with a conventional mortgage. In other words, if you buy a property with a conventional loan, right after you close you can turn around and re-finance it with a FHA 203k loan allowing you to obtain extra money to do some rehabbing on the property. So why not make the initial offer with an FHA 203k loan and why did I not recommend a conventional loan to my client and encourage him to save the cash for the rehab? To get that answer I suggest you read my article on Multi-Offer Strategy.
Ciao for now!
Basic Fha Home Mortgage Loan 203
The loan is intended for a borrower who wishes to purchase or refinance a primary residence. An FHA 203 home loan is funded by a lending institution such as a bank or credit union and insured by HUD.
To be eligible for a Basic home mortgage loan 203 a borrower must:
- Meet standard FHA credit qualifications.
- Approximately 96.5% of the purchase price may be financed, plus the upfront mortgage insurance premium.
- Eligible properties are 1-4 unit structures.
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How Many Times Can You Use A 203k Loan
A contractor can only draw for two draws during a streamlined process. A single contractor can handle most of the work. If there are only two other contractors involved, there is less possibility of being in danger. When you have settled your loan, wont receive a settlement check for it, it will be paid to the contractor on the receipt of your loan closing.
Can I Refinance Into A 203k Loan
Most people use the FHA 203k loan to buy a home, but it can be used for refinancing, too.
As long as you have at least $5,000 in improvements, you can use this refi option.
The lender will order an appraisal that shows two values: the asis or current property value, and the improved value after renovations.
Your maximum refinance loan amount is the lowest of these three calculations:
- The existing debt before rehab, plus the estimated cost of improvements and allowable closing costs
- The asis value plus rehab costs
- 110 percent of the afterimproved value x 97.75%
If you have owned the property for less than one year, the lender must use acquisition cost, plus the documented rehabilitation costs, for your maximum loan amount.
You do not need to have an existing FHA loan to use an FHA 203k loan for refinancing.
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Exit The Property By Selling Or Refinancing Your Rehab Loan
Now that you have renovated your property successfully, you need to proceed with your exit strategy. This is typically done by refinancing into a permanent loan for a long-term investor or selling the property for a profit for a short-term investor.
Having a renter in the property for six months or more is referred to as seasoning, and some lenders require it before they will make a loan on an investment property. Unfortunately, exit strategies can take time. It may take two months to either sell the property or find a renter and refinance to a conventional mortgage. During this time, the investor continues to incur additional holding costs.
Fha 203k Streamline Rehab Loan
For properties needing minor repairs and the cost of construction of $35,000 and under, the mortgage loan borrower can select the FHA 203k Streamline loan. The type of work that can be done with an FHA Streamline mortgage loan program is much more restrictive. The homeowner cannot do any structural changes to the existing home. Room additions are not allowed. Work that is permitted is the following:
- kitchen and bathroom remodeling
- finishing an existing attic and basement
- roofing, new windows
- repairs that do not require structural changes
- patios and porches
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Hard Money Rehab Rates Terms & Qualifications
Interest rates on hard money rehab loans generally run between 7% and 12%. While these rates are higher than conventional mortgages, they reflect the additional risk inherent in rehab projects and the short expected loan duration. In almost all cases, investors make interest-only payments and repay the full principal at the end of the loan.
|75% after repair value|
Rehab loans for investors combine funds for purchasing and renovating a property into a single loan. Hard money lenders typically set a maximum loan amount using a propertys ARV ratio. The ARV ratio represents a percentage of a propertys expected fair market value after renovations are completed.
Experienced investors can sometimes achieve higher ARVs. However, they can expect to cover at least 25% of a propertys ARV with their own cash. Some rehab financing providers also require investors to pay for renovations upfront and submit invoices to the lender to get reimbursed for the rehab costs.
Home Renovation Loan Alternatives
There are several reasons the FHA 203k might not be your best option.
You may need only a few thousand dollars for minor work, for example. Or your renovation might be too luxurious or pricey for FHA guidelines. You might want to do the work yourself.
Or youd prefer a loan that doesnt require mortgage insurance for life.
In that case, there are other loans, and at least one might be a better fit:
For more information and help deciding which type of loan to use, see: 6 types of home improvement loans which one is best for you?
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Hard Money Rehab Loan Qualifications
Rehab loan qualifications vary, but most lenders require some real estate experience, at least a 25% down payment, and bank statements to verify assets and income. Properties being purchased or renovated with rehab loans also typically need to be in locations acceptable to lenders.
|Minimum Credit Score|
|One to two completed projects, construction background, or work with licensed contractor|
Energy Efficient Fha Mortgages
Energy efficient mortgages backed by the FHA are designed to help a borrower finance energy saving improvements and renewable energy systems. Improvements made with an EEM help to make home operating costs lower and generate more potential income.
To qualify for an EEM, a borrower must obtain a home energy assessment to identify energy efficient opportunities and the cost-effectiveness of the improvements.
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How Does Someone Come Ta Debt
In the wake of an assumable mortgage, it seems a fairly straightforward thing: you take over a contract that is similar to one you signed and keeps everything the same interest rates, loan amounts, and terms. If you have conventional loans, your lender cant assume your FHA or VA credit scores. It is not possible for anyone to assume an existing mortgage completely.
What Is An Fha 203k Loan
An FHA 203k loan allows you to finance not one, but two major items:
This loan addresses a common problem when buying a fixer home: lenders often wont approve loans for homes in need of major repairs.
Because the lender tracks and verifies repairs when using a 203k loan, it is willing to approve a loan on a home it wouldnt otherwise consider.
That said, for a lender to approve financing, the home must already meet certain safety and livability standards.
If the home is too run down, you wont be able to use an FHA 203k rehab loan.
This program can be a good option for people on a tighter budget, who want to buy an older or rundown home and repair it rather than buying a more expensive turnkey home.
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What Are The Cons Of A 203 Loan
Now that you have a clear idea of what a 203 loan is all about, it is time to consider the drawbacks. In order to prevent rental property investors from using 203 loans to build their portfolios quickly and efficiently, and thus avoiding the hardships many lenders pose as portfolios grow, investors are not allowed to use 203 loans to finance their rental properties. Those looking to utilize a 203 loan must occupy the property themselves for a minimum of 12 months unless you are a qualified non-profit organization. That said, a 203 loan can still be an excellent opportunity to buy a property, enjoy it for a while, and then turn it into a rental property after the 12-month minimum residency.
Where To Find Investment Property Locs
Only certain lenders offer investment property LOCs. They arent always available at local banks and credit unions. You can check with commercial lending departments at local banks to see if an investment property LOC exists. CoreVest offers lines of credit on real estate portfolios starting at $1 million, with interest rates starting at 7%.
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Fha 203k Loan Requirements For 2021
A 203k is a subtype of the popular FHA loan, which is meant to help those who might not otherwise qualify for a mortgage.
FHAs flexibility makes 203k qualification drastically easier than for a typical construction loan.
203k credit score requirements
FHA allows credit scores down to 580, although some lenders might require a score of 620640 to qualify for a 203k loan.
Still, thats much lower than the 720 or higher you would probably need for a conventional construction loan.
Minimum down payment
FHA requires just a 3.5 percent down payment, based on the purchase price and total project cost. For instance:
- Home price: $200,000
- Total project cost: $25,000
- Down payment: $7,875
You can receive 100 percent of your down payment requirement via a gift from family or an approved nonprofit organization.
Income and debt requirements
Lenders will examine your debttoincome ratio, too. This is the comparison of your monthly income and debt payments.
Typically, less than 43 percent of your income should go toward your proposed mortgage payment plus all other debts.
Thats $430 in payments per $1,000 of beforetax income.
For example, if your income is $5,000 per month, your future house payment plus auto loan payments, student loan payments, and credit card bills shouldnt exceed $2,150 per month.
Using an FHA 203k loan, you can borrow up to 110% of the propertys proposed future value, or the home price plus renovation costs, whichever is less.
Rehab Loan Alternatives For Investment Properties
FHA 203k loans arent the only way to buy and renovate a home with one loan. Fannie Maes HomeStyle Renovation and Freddie Macs CHOICERenovation products can do much the same thing.
Since the HomeStyle and CHOICERenovation loans are conventional mortgage loans, they wont charge for private mortgage insurance if you put at least 20% down. This can save home buyers a lot of money on their monthly mortgage payments.
However, like the 203k loan, these programs are only available for primary residences.
If youre buying a true investment property meaning you wont live in one of the units yourself these loans arent an option.
But investors have other renovation loans to choose from.
Traditionally, you would buy a home with a mortgage and then borrow separately perhaps with a home equity line of credit or home equity loan to make improvements. Then you could potentially refinance both loans into one later on.
Another option is using a cash-out refinance on your investment property or primary residence and putting the cashed-out funds toward repairs or upgrades.
Of course, all these types of loans require you to have enough equity built up to cover the cost of repairs.
And if you choose to draw from the equity in an existing investment property, youll pay higher interest rates.
But the upside is that there are no rules about how the funds can be spent. So if luxury upgrades are on your agenda, this could be the way to go.
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Be Prepared To Navigate A Lot Of Red Tape
InvestopediaForbes AdvisorThe Motley Fool, CredibleInsider
An FHA 203 loan allows would-be homeowners who don’t have a lot of cash to buy a property in need of repairs. FHA 203 mortgages are backed by the government and essentially finance both the purchase and repairs on a home.
These loans are intended to support homeownership among lower-income households, allowing them to improve and update older properties as their primary residence. For eligible borrowers, an FHA 203 loan is often the only way to finance a property needing significant repairs, but there is a lot of red tape involved. Outlined below is the process and what to expect.
What If A Borrower Already Owns A Home
If a person has already purchased a home, he or she can refinance his or her current mortgage using the FHA 203k loan. This presents smart borrowers with another legitimate opportunity to take advantage of the FHA 203k loan. A borrower could spend the 203k loan on refinancing his or her current mortgage, renovate the home, then move after twelve months and rent out the home as an investment property.
FHA allows a borrower to rent out a property he or she still owns with the 203k loan, provided:
- He or she met the 12-month permanent residence condition
- He or she moved for a valid reason, such as moving to a bigger house to accommodate a growing family or a job relocation
If the borrower already moved and rented his or her previous home out, then he or she wouldnt qualify for the 203k rehab loan, as the home isnt his or her primary residence anymore.
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The House We Didnt Get
This story is relevant to our 203k bid, so stick with me.
The first property we bid on was a gorgeous colonial, where Edna lived since the 2nd World War. God bless her, it was a time capsule of original trim woodwork, stained glass windows, and shag carpet you had to see to believe.
Ednas house also boasted knob and tube electric and two in-use underground oil tanks .
The estate was asking $345k. We bid $315k with the condition that they would take out the oil tanks. Someone else bid $360k no questions asked .
NJ was a hot ticket in the summer of 2016! We were so sad that we lost the bid, but kept on searching for our home.
How Can I Qualify For A Fha 203k Loan Program
Since FHA 203k Loans are FHA-insured loans. The same FHA lending guidelines apply with FHA 203K loan programs as it does with the standard FHA lending guidelines. However, lenders may impose higher guidelines with 203k Loans called mortgage lender overlays on top of the minimum mandated by HUD. Some overlays with 203k Loan programs imposed by 203k lenders may be the following:
- higher credit scores
- lower debt to income ratios
FHA 203k mortgage rates are normally 0.50% higher than standard FHA loans.
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