If you’re currently shopping for homes, it’s possible that you find one that may need a little makeover to be liveable again. Just like humans, homes can need a little tender loving care, too. If the home at hand is being sold via a short sale or possibly a foreclosure, it’s highly possible that the previous homeowner didn’t leave the place in mint condition. If the house at hand was left vandalized or abandoned, it’s highly possible, too, that the house will call for having to be rebuilt or heavily rehabilitated in order to be habitable again. This is where rehab loans enter.
First Step To A Rehab Loan
Should you want your future home to be renovated, the initial course of action is to contact a contractor to work on specifications needed to be done on the house. Lending firms will need to witness every single detail of this report to know where the money will be spent. That said, these lending firms then add a 10 to 15 percent contingency on the agreed funding. Before work is even done, the loan has to be closed first. After which the funding intended for repairs and overhauls is placed in an escrow fund and distributed as every project is finished.
Projects that don’t call for drastic structural work have two disbursements. Meanwhile, projects with larger architectural activity may have several draws over the escrow. On that note, standard timeframes for home rehabilitation usually lasts for about 6 months. But in rare cases, lending companies will permit a debtor an entire year.
How FHA 203k Loans Work
With Federal Housing Administration 203k rehab loans, the mortgage insurance is integrated onto the loan itself. Contrary to conventional loans, a 203k loan is a two-in-one deal. In other words, there is an absence of a different mortgage insurance grant. That being said, 203k’s mortgage insurance only adds a heftier amount to be paid for on a monthly basis—something not present in a conventional mortgage. Still, because of the lessened down payment, 203k is still arguably more attainable and is still king in rehab loan market.
Moving forward, renovation projects are meant to boost the value of a home by more than the funding used for rehabilitation. Because of this, several borrowers choose to refinance just one year after obtaining a 203k loan.
Two 203k Types
All that aside, there are two 203k flavors under the FHA: Standard 203k and Limited 203k.
Standard 203k Loan
The first one is meant for more massive architectural work such as adding bathrooms, expanding a living area, breaking walls down to make wider certain rooms, changing floor plans entirely, and other similar work. This 203k loan sub-type permits for the home to be unlivable for a certain duration because of renovations. Should the debtor need financing for temporary rent elsewhere, the cost for this can be included on the mortgage.
Limited 203k Loan
Limited 203k, on the other hand, is meant for homeowners who want to improve or repair only minor things in the home such as repainting walls, upgrading furniture, fixing water pipes, bettering a kitchen top, and so on.
Apply For A 203k Loan
If the question: “what is a rehab loan?” still rings strongly in your head, click the link to be routed to the leading FHA lenders!