Renovation Loans
Renovation Overview
Also known as a rehab loan renovation loan, FHA 203(k) are purchase or refinance loans that cover the cost of the home itself and the cost to renovate in one fell swoop. These are a good option if a buyer is considering a home that needs a number of repairs, and meets the FHA requirements to qualify. Repairs must be completed by a contractor, the borrower must have a 500 credit score or better, and the property must be the borrower’s primary residency.
Types Of 203(k) Rehab Loans
There are two types of 203(k) loans.
Streamline Also known as a limited 203(k), is used on homes that require fewer repairs. Streamline rehab loans don’t have a minimum cost, but they do have a cap of $35,000 and major structural repairs are excluded from what the funds can be used for. Streamline loans are great for things like installing energy-efficient windows, improving curb appeal, or redoing landscaping.
Standard On the other hand, a Standard 203(k) rehab loan can be used for major structural repairs. Repairs covered under Standard rehab loans must cost a minimum of $5,000 to complete and a HUD representative must be consulted and oversees the entirety of the renovation process. Plumbing, roofing, waste system, and major interior work are can all be covered by a Standard rehab loan.
One thing worth noting: luxury upgrades like a swimming pool, hot tub, or outdoor kitchens are not covered by either Streamline or Standard 203(k) rehab loans. The easiest way to think about it is that if the work doesn’t improve the home’s livability or functionality, it’s likely not covered.
Benefits Of A 203(k) Rehab Loan
- A great benefit of this loan is that it combines the funds needed for the renovation with the home mortgage, which is great for buyers because it will limit the closing costs, since one loan will fund both needs.
- If you purchase a fixer-upper, it could not only save you money when putting a mortgage on a home, but there are very little limitations on the types of renovations you can make.
- With a renovation loan you are able to increase your home value and curb appeal while also building equity in your home from the start.
- An additional benefit to a renovation loan is that it doesn’t require collateral, so the equity of your home won’t be taken into consideration by your lender. This means that your lender can’t foreclose your home if you default on your loan.
Rehab Loan Requirements
You’ll need a credit score of at least 500 to qualify for an FHA 203(k) loan, though some lenders may have a higher minimum.
The minimum down payment for a 203(k) loan is 3.5% if your credit score is 580 or higher. You’ll have to put down 10% if your credit score is between 500 and 579.
FHA loan limits vary depending on where you live, but are generally capped at $356,362 in low-cost counties and $822,375 in high-cost counties.
In most cases, a foreclosure within the past three years will prevent you from qualifying for an FHA loan.