Sometimes you can buy a home that is in disrepair, but has lots of potential, for less than the asking price. But home makeovers cost money. To help homeowners get the cash they need to make improvements, HUD -- the U.S. Department of Housing and Urban Development -- offers the 203(k) loan program that grants loans insured by the Federal Housing Administration (FHA). This is a way for you to finance the purchase of a home and include the costs for eligible repairs in a single loan. Any updates you make must add value to the home, points out Bankrate.com.
Find a home you want to buy that needs updating. Submit an offer to buy the property. Either an attorney or a real estate agent can draw up the sales contract. Make certain the contract states that the purchase is contingent upon you getting approved for an FHA 203(k) mortgage loan.
Contact an FHA-approved lender of your choice to apply. For a streamline 203(k) loan, the nonstructural home improvements you plan to make must cost at least $5,000 but no more than $35,000, according to HUD.gov. Otherwise, you will have to apply for a 203(k) loan that covers structural improvements that will cost more. For either type of 203(k) loan, the total amount you can borrow must fall within the FHA mortgage limit for the county and state where the home you are buying is located.
Complete a loan application and submit the required documentation. A lender will request a purchase contract for the house you are buying, your credit report, a list of your debts and proof of income to determine if you qualify for a loan.
Show that you have the funds to make the required down payment. For an FHA 203(k) loan, you need to put down at least 3.5 percent of the total amount you want to borrow, including the home’s purchase price and the costs to repair it, reports Forbes.
Pay for an appraisal, which shows the lender how much the house is worth. The appraiser will offer an after-improved value of the property. In some cases, the lender may also request a separate appraisal of the property’s as-is value -- how much the property is worth before making improvements. Although you can order your own appraisal of a house you want to buy, the lender won't accept that appraisal report for financing. The lender you choose will order its own appraisal and then pass along the cost to you.
Hire a professional home inspector to inspect the interior and exterior of the home including inspection of the roof and existing structural, heating, plumbing and electrical systems. A home inspector will determine the condition and safety of the property to ensure that it complies with local codes and ordinances, and HUD basic energy efficiency and structural standards.
Provide the lender with a detailed plan showing the proposed renovations and updates to the property. If you intend to include an addition to the existing structure, you must supply the lender with a plot plan of the site. The plan must show where the dwelling and other structures are situated on the lot in addition to the location of walkways, driveways and streets.
Prepare a cost estimate for the lender. The estimate must include the itemized costs for both labor and materials. Get bids from three contractors. Even if you plan on doing some of the work yourself, include the cost of labor in the event you must hire a subcontractor to complete the work.
Wait for loan approval. If you are approved for a loan, the lender will pay the seller the sale price of the home at closing. The money for repair costs is placed in escrow to pay for repairs as the work is completed and passes HUD inspection, notes Realtor.com. You will have up to six months to complete the repairs.
With a 203(k) loan, you can get an extra 10 to 20 percent of the estimated repair costs to be held in reserve to cover unexpected repair expenses.
Generally, the financial information lenders ask for includes recent pay stubs, W-2 forms, federal income tax returns for the last two years, bank statements for the previous three months and debt information.
The property you are buying also must be inspected for rodents and termite or other insect infestation when applying for a 203(k) loan.
- HUD.gov: Rehab a Home w/HUD’s 203(k)
- Realtor.com: How the Government Can Help You Buy a ‘Fixer-Upper’ Home
- Forbes: The FHA 203(k) Loan -- A Home Repair Loan and Mortgage All In One
- Bankrate.com: FHA Offers Home Renovation Help
- HUD.gov: 203K Rehabilitation Mortgage Insurance
- Federal Deposit Insurance Corporation. "The Home Mortgage Appraisal: How Consumers Can Benefit." Accessed May 27, 2020.
- The Appraisal Foundation. "A Guide to Understanding a Residential Appraisal." Page 4. Accessed May 28, 2020.
- With a 203(k) loan, you can get an extra 10 to 20 percent of the estimated repair costs to be held in reserve to cover unexpected repair expenses.
- Generally, the financial information lenders ask for includes recent pay stubs, W-2 forms, federal income tax returns for the last two years, bank statements for the previous three months and debt information.
- The property you are buying also must be inspected for rodents and termite or other insect infestation when applying for a 203(k) loan.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.