As you know, some homebuyers aren’t keen on purchasing “fixer-upper” properties. They may think renovations take too much time, or they are concerned about financing the improvements.
Did you know there are particular mortgage loans, like the FHA 203k Home Improvement loan, explicitly designed to help your clients afford home improvements while building equity? Understanding how these loans work will allow you to offer an important solution for clients who might be struggling to find the perfect home.
The FHA 203k Home Improvement loan is a specific type of mortgage through the Federal Housing Administration (FHA) geared toward homebuyers and homeowners looking to improve their homes with repairs or upgrades. The funds can be easily and quickly accessed to pay for property repairs or improvements, including those identified by a home inspector or an FHA-approved appraiser.
There are two types of FHA 203k Home Improvement loans that your clients could benefit from.
The streamlined 203(k) is designed primarily for minor repairs, such as new carpet, painting, or replacing windows. These loans are restricted to a $35,000 renovation budget and can’t include structural work.
The traditional 203(k) is intended for structural repairs and is limited based on state and county lending limits. For example, in Ohio’s Mahoning County, applicants may be eligible for up to $420,860 with a 203(k) in 2022.
This is a quasi-construction loan, which borrowers can use for such projects as roof replacement, knocking down load-bearing walls, or creating additional living space.
You may think this doesn’t sound much different from a traditional loan. However, the 203(k) loan can be an excellent option for your clients looking to get a deal on a fixer-upper home but don’t have the cash to renovate it outright. Unlike a traditional loan, the 203(k) doesn’t require the house to be in mint condition because it looks at the property as if the work is already completed.
Here’s an example: Let’s say your client is looking at a foreclosure property in a $200,000 neighborhood in Mahoning County. That property is selling for $100,000, and your client decides to put $50,000 worth of work into it.
They rehab it and bring it back to life using that $50,000, and now it’s appraising at $175,000. They couldn’t accomplish that with a traditional loan because of the average condition prerequisite “before closing.”
Rather than waiting to save $150,000 to make those improvements, this loan will get your client there faster and make it much easier to manage the cost. For that $50,000, your client is only looking at a monthly payment of a few hundred dollars.
Of course, there are stipulations. The improved home must be at least one year old and must be the buyer’s primary residence. The cost of the rehabilitation must be at least $5,000, and the buyer must pass a credit check, have a steady income, and have the financial reserves to make the monthly mortgage payment.
Does this sound like an ideal mortgage solution for any of your clients? Learn how we can help you recommend this approach by contacting a member of our mortgage loan team.