|The following information is from Rad Heroman who is a title attorney for Stewart Title in Baton Rouge, LA. Rad was kind enough to be a guest blogger today and explain 203(k) renovation loans.|
|Those home buyers looking to save some money should not overlook properties in need of extensive repair. The Federal Housing Administration’s 203(k) program provides for loans that cover both purchase and renovation for single family homes and multifamily homes with up to four units.
The total loan amount is based upon the property’s appraised value once the repairs have been completed. The down payment requirement is only 3.5%. Using this program, someone who buys a run down home and chooses their renovations wisely, can stand to make a quick return on their investment. Getting the right home at the right deal can help homebuyers taking advantage of 203(k) loans build instant equity.
While the 203(k) loan program has been around since the late 70’s, it was not widely used until foreclosures became so prevalent a decade ago. Then, it became a tool necessary to sell or buy those properties in poor condition.
These loans, however, are not available to investors – borrowers are required to live in the properties. However, it is possible, and not uncommon, for borrowers to take advantage of a 203(k) loan to renovate a multifamily home, live in the property for a year or so, refinance into a conventional loan, and sell the property.
203(k) loans are more expensive than conventional financing because interest rates are slightly higher (30 year fixed rate is around 3.75 to 4 percent) and mortgage insurance is required. Also, borrowers must pay a building consultant who writes the initial estimate for the cost of repairs. The consultant ensures the repairs will bring the property up to government health and safety standards.
The loan will not cover for luxury items, such as a pool, but will make allowances toward the cost of repairing or removing an existing pool.
The renovations must be complete within six months of closing. The contractor is paid in intervals after inspections reviewing the progress of the work. It is important contractors understand that they will not be paid upfront and that they must adhere to the requisite timelines.
Loan limits depend on where the property is. For single family homes, the range is from $271,050 to $729,750.
The reputation among these loans is changing, from that of slow to get to closing, to a more favorable option, as mortgage representatives are becoming more familiar and borrowers are seeing that these loans may be their only hope for getting financing on run down properties.
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