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Tuesday, January 19, 2010

FHA 203(k) and 203(k) Streamline: AKA "The rehab loan."

Many homebuyers are passing up opportunities for homes they would really love simply because they are listed as "Cash- only" or "Conventional financing only." While the standard FHA 203(b) loan does have more stringent property requirements than conventional loans, the 203(k) rehab loan allows for buyers to fix the problems that would have otherwise kept the home from qualifying for FHA financing. In the process, the buyer also gets a more updated house and one more to his or her liking because they have finished things according to their tastes.

The 203(k) streamline loan has a maximum improvement amount of $35,000 and structural repairs are not allowed. This version is for things like new carpet, paint, cabinets, fixtures (toilets, sinks, etc.) and other more minor items. This is a great way for a buyer to update an older home or one that has deferred maintenance.

The full 203(k) loan has a maximum rehabilitation amount up to the loan limit of FHA which means the old house can be torn down and rebuilt if necessary. This is the obvious choice for homes in need of major repair to make it livable.

Key elements of the FHA 203(k) Rehab loan are:
  • bids must be from a licensed contractor
  • all work must be done by a licensed contractor
  • draws are handled by escrow (2 for the streamline and up to 7 for the full 203(k))
  • buyer has more choices and usually less competition on homes that would require these loans
  • buyer can customize the home and make it their own
  • the loan looks and feels just like any other FHA loan to the borrower other than having either a slightly higher rate or cost - depending on how the deal is structured.
Here's how it works: if a buyer agrees to a purchase price of $100,000 and the home needs about $20,000 worth of work based on the bids, then the total cost would be $120,000. The appraiser would appraise the home subject to the work being completed and would have a copy of the bids to complete the appraisal. Assuming the appraisal comes in at $120,000, the down payment requirement would be 3.5% of $120,000 or $4,200. The seller can still contribute up to 6% of the purchase price toward closing costs.

Changing gears: The deadline for the homebuyer tax credit is fast approaching. In order to qualify, a buyer must have a home under contract by April 30th and must close by June 30th. This is free money for those who qualify; first-time home buyers will receive up to $8,000 and current homeowners looking to move can receive up to $6,500. If you are thinking of buying a home, now is the time.

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