6 Important Benefits From FHA’s 203k Streamline & Standard Loans
FHA 203k Streamline & Standard Loans
There are two types of 203k loans the streamline and the standard. Which one you choose depends on the extent of the repair work. Six important benefits from FHA’s 203k streamline and standard loans. NSH Mortgage has the knowledge and tools that can help you discover the differences between FHA 203k streamline and standard loan works and how they can potentially help you with your finances with a FHA loan.
So why choose the streamline 203k option? Because more lenders offer it than the full 203k. In addition, it is a much simpler process than the standard option. A FHA 203k loan is a little different from a regular loan, because you will be submitting your list of improvements, and the loan does not completely fund until the improvements are complete.
This option allows you to do relatively minor repair work. Things like kitchens and bathrooms. The stated limit to costs is $35,000.
However, a FHA 203k loan requires a buffer equal to 15% of the total bids. This buffer is called a contingency. It is a temporary fund to cover cost overruns by your contractor. If the contingency fund is not used, it is credited back to you. So, your real maximum repair job can cost around $31,000.
Most non-structural, non-luxury items are acceptable:
- Kitchen, and bathroom remodels.
- Appliance replacement.
- Carpet and flooring.
- Roof replacement.
- Repairing safety and health issues.
- Energy efficient improvements.
- In addition, to much more.
In short, you cannot do anything structural or change the footprint of the home. So why choose the streamline 203k option? Because more lenders offer it than the full 203k. In addition, it is a much simpler process than the standard option.
With this option, you can do just about anything you want to the home, except non-permanent changes or adding luxury amenities.
- Structural alterations.
- Convert an one family home into a two, three, or four unit home, or vice versa.
- Connect to public sewer or water.
- Some larger landscaping projects.
- Improve accessibility for disabled persons.
- Move the house to a different site.
What You Cannot Do With The Loan
- Minor landscaping.
- Add a luxury amenity like a tennis court, barbecue area, or swimming pool.
- Projects that can take longer than six months.
203k Loan Rates & Mortgage Insurance
Mortgage rates are somewhat higher for FHA 203k loans. Expect to receive a rate about 0.75% to 1.00% higher than for a standard FHA loan. Still, base FHA rates are some of the lowest on the market, so 203k rates are competitive.
You will pay standard FHA mortgage insurance, which is typically 1.75% of the full loan amount upfront and 0.85% yearly which is broken into 12 monthly payments. On a $250,000 loan, that is $4,375 upfront and $177 per month.
Using The 203k Loan Step By Step
Here are the steps you will complete when buying a fixer upper with a FHA 203k loan. It is a little different from a regular loan, because you will be submitting your list of improvements, and the loan does not completely fund until the improvements are complete.
- Find a lender approved to do 203k loans. Get several mortgage quotes so you can be confident that you are getting a good deal.
- Apply for your home loan and get a pre-approval letter.
- Find a property. Make sure that your offer contains language showing that you need a 203k loan to complete the purchase. Note that your maximum loan amount calculation is different for purchases. Check out HUD’s Maximum Mortgage Worksheet for more information.
- Find a FHA 203(k) consultant, if your improvement costs will exceed $35,000. This person will arrange for a detailed proposal from licensed contractors. It will contain the scope of the work to be done and a detailed cost estimate.
- Find a contractor to write an estimate of work needed and materials required. You are not allowed to do the work yourself unless you are a professional builder.
- The lender, after giving you the okay, will get your home appraised with or without improvements.
When the loan closes and funds, the seller gets paid. The rest of the money from your lender goes into your escrow account. The lender, or its agent, releases es-crowed funds to the contractor as work is completed.
Once your contractor completes the work, you own a renovated house that may already be worth more than you paid for it. That is a sound investment as well as a home customized to your needs.
You Can Also Use A 203k To Refinance
Most people use this loan to buy a home, additionally it can also be used for refinancing. While you have at least $5,000 in improvements to do, you can use this refinance option. Your maximum refinance loan amount, subject to FHA loan limits, is the lowest of these three calculations:
- Your current mortgages on the property plus rehabilitation and certain closing costs.
- The current property value plus rehabilitation costs.
- Next, 110% of the improved value multiplied by FHAs 97.75% maximum loan to value ratio. This is 96.5% for purchases.
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. The lender orders an appraisal that shows two values: the as is or current property value, and the other provides the improved value.
Your maximum loan amount is the lowest of:
- The existing debt before rehab, plus estimated cost of improvements and allowable closing costs.
- Afterwards, it is the value plus rehab costs.
- Lastly, its 110% of the after improved value multiplied by 97.75%.