Check Out What One Family Did With the FHA 203k Renovation Loan
- FHA 203k loans require lower down payments than Traditional
- A lower down payment frees up money for other uses
- Two-Step Strategy – refinancing an FHA 203k loan into a Traditional Conventional mortgage
John and Lauren DeSantis recently finished renovations on their new home and they love it. They found a house that had potential, but needed some TLC.
“I just knew it had some good bones,” Lauren said. “I could just see the vision, I could see what I wanted to change.”
After meeting with them, we felt they were perfect candidates for a renovation loan. We met with them for preapproval strategy discussions. Neither had ever heard about FHA 203k lending before, which made them skeptical at first. After considering loan options, they saw the benefit of FHA 203K financing over a Traditional Conventional loan. The latter would have completely wiped out their savings, leaving little money to make the renovations they wanted. So while they were preapproved for both lending options, they chose the renovation strategy.
Using the FHA 203k loan, they paid 3.5% down payment for the house. And because renovation costs are included in the loan (vs. out of pocket), they didn’t have to fall into heavy consumer debt to make their dream home. And they didn’t deplete their savings.
“That made this house even more appealing because we knew we were going to have to be renovating,” John said. “The idea that we could actually do that right off the bat was a selling point for us for this house.”
The renovations included:
- Floors throughout the home
- Entire family room
- Fresh coats of paint
- Added air-conditioning
- Replaced the furnace
- Changed all outlets
Using FHA 203k financing to make the home renovations also freed up plenty of money to use after closing, allowing John and Lauren to upgrade landscaping. They put a lot of work into their entire yard, including tree removal, which they wouldn’t have been able to do had they not used renovation lending.
Watch the video to see how the home turned out!
The Two-Step Strategy
In the case of the DeSantis house, we employed what I call a Two-Step Strategy. The first step is using the FHA 203k loan to make the initial purchase and finance the renovations. It’s an extremely valuable financing tool for many reasons, including:
- The down payment is lower than a Conventional loan
- It permits renovations to be financed
- It considers the value of the property subject to completion of the renovations
However, with lower down payments comes additional payment obligations. Mortgage Insurance Premiums (MIP = FHA financing) and/or Private Mortgage Insurance (PMI = Conventional financing) are added. This factor is associated with increased monthly payments…and most times, only near term.
Once the renovations are complete, the home is reappraised at a value higher than what they originally paid. The instant equity was enough to cover the difference in what they originally paid when purchasing the home, and allowed us to take the second step and refinance their mortgage into a Conventional loan.
Because traditional financing has lower rates than renovation financing, using this strategy is sensible. Additionally, with Conventional financing, PMI recognizes the amount of equity in the cost factor.
As a result, two things happen:
- They enjoy a lower interest rate
- The PMI is lower. Typically, PMI is less than MIP with several factors determining this outcome. And unlike MIP, Conventional loans permit removal of PMI at 78-80% loan-to-value, or 20-22% equity.
The Two-Step Process depends on each buyer’s unique case, but it is a very cool addition to my toolbox. Drop me a line if you have any questions about it.
Until next time!