For homeowners who have fallen in love with a home in need of extensive repair, the path to home ownership has often been a time-consuming, cumbersome one. Indianapolis AmeriFirst Home Mortgage Branch Manager Michael McClain has a recommendation for these aspiring homeowners: the FHA 203K Loan program.
This loan is designed to allow a buyer to purchase a home that doesn’t currently meet FHA habitable guidelines. This often includes bank-owned- and HUD-owned homes, as well as distressed, foreclosed and run-down homes that would not typically qualify for a standard conventional loan or a standard FHA loan. The draw of the program is that it allows buyers to roll both the cost of the home and the rehabilitation costs of the home into one loan. The buyer only has to deal with one loan and one lender.
While this loan is convenient for the buyer, it’s a complicated process on the back end for the lender, so as Michael points out, very few lenders in the country are FHA 203K-approved lenders. “But at AmeriFirst, we have staff set up to handle the loans. We’re very good at it. We know the program extremely well.”
Who is eligible for this type of loan?
- A buyer purchasing a run-down home.
- A current homeowner with an existing mortgage who wants to do home renovations. As long as the loan amount does not exceed the $271,000 cap (Indiana numbers) and the house appraises at or above the loan amount, he or she is eligible. In this case the current mortgage would be converted to FHA and the rehab costs would all be rolled into one payment.
- A homeowner who has already paid off his home and wants to do renovations. As long as the total loan amount is under the $271,000 cap and the home appraises at or above the loan amount, he is eligible.
There are actually two components to the FHA 203K Loan program: the Full program and the Streamlined version. Let’s compare the differences.
|Rules Regarding||FHA 203K Loan Full||FHA 203K Loan Streamlined|
Amount of Loan
|*$5000 – $271,000 (total loan including home purchase price and rehab costs not to exceed $271,000). Total loan amount may also not exceed appraisal, which is done on “as completed” value of home.||*$5,000 – $35,000 are allowed for rehab costs, which is in addition to purchase price of home (again total loan may not exceed $271,000 cap). Total loan amount may also not exceed appraisal, which is done on “as completed” value of home.|
|Work Completed within:||6 months of closing date||6 months of closing date|
|People involved:||HUD consultant, FHA-approved appraiser, FHA-approved lender, contractor, client||FHA-approved appraiser, FHA-approved lender, contractor, client|
|Contractor:||Qualified contractor must be Insured, licensed, bonded,||Qualified contractor must be Insured, licensed, bonded,|
|Type of Rehab allowed with this loan:||Structural and cosmetic||Cosmetic only, no structural (no moving or adding walls or rooms)|
|Rehab funds kept in escrow account paid on draws by the lender to the contractor:||Yes||Yes|
|*Numbers reflect Indiana guidelines|
Generally, AmeriFirst has a quick approval process for the FHA 203K Loan program; within 24 hours they will have an answer for a buyer. Upon approval, the appraisal process starts.
- AmeriFirst has the contract for the price of the home that the buyer has negotiated with the seller.
- AmeriFirst gives the buyer a list of approved contractors, such as Booher Building, to contact.
- The contractor does a line-item bid on the home renovations and gives a copy to the lender
- The FHA-approved appraiser figures the appraisal based on the purchase price of the home and the bid from the contractor. The appraisal is an “as completed” appraisal, based on the value of the home and the value of the renovations as if they were completed. The appraiser also uses comps of similar homes in the same area that have already been renovated and sold. If the loan amount does not exceed the price of the appraisal (and the FHA $271,000 cap), then the process is approved.
Once the appraisal process is completed, the renovation work can start. The lender will hold the renovation funds in an escrow account and pays the contractor directly when designated work has been completed and passed FHA-draw inspections, which both the contractor and homeowner must sign off on. At the end, a final inspection is held and once approved, the final payment is made.
Ultimately, Michael sees the FHA 203K Loan program as an answer to the hundreds of thousands of homes in Indiana that are foreclosed, bank owned or distressed and ineligible for conventional financing. If people can look at a home for its potential and overlook it’s current state of disrepair (knowing that they will be able hire a home remodeler to make repairs to their specifications), then there are some great deals to be made.
“This program will be around for a long, long time, and it’s going to be the prime program to get us through this inventory of all these foreclosed homes, and the good thing to the potential buyers is that they’re going to get a good deal on the property, “Michael said. “They’re going to be able to buy it right and do the improvements and still be in a good equity position on their homes. That’s what the program allows.”
For information on the FHA 203K Loan program in Indiana, contact Michael McClain (current branch manager) at AmeriFirst Home Mortgage at 317-254-8800.