August 20, 2024
If you want to save money on purchasing a home, buying one that requires improvements or renovations can be a wise financial decision.
FHA Rehab loans can help whether you want a fixer-upper property that’s new to you, or you want to remodel your existing home.
These government-backed mortgages, or 203(k) Rehabilitation loans, combine the home purchase cost and renovation expenses into a single mortgage. This program lets you buy a house that would not otherwise pass the appraisal process.
The FHA offers two primary types of Rehab loans to cater to different project scales. The Standard 203(k) option suits major rehabilitation projects typically requiring structural repairs, additions, or extensive remodeling.
The minimum repair cost for this option is $5,000, and a licensed contractor must complete the work. There is no maximum cost limit for repairs under this loan type. On the other hand, the
The FHA Limited 203(k) is a streamlined option for minor repairs and improvements. This option has a maximum repair cost of $75,000, a significant increase from the previous limit of $35,000. Unlike the Standard 203(k), there’s no minimum repair cost for the Limited 203(k) option.
FHA Rehab loans offer several advantages over conventional financing. These advantages include a lower down payment requirement, with potential eligibility for a down payment as low as 3.5% of the appraised value after repairs.
Additionally, FHA loans generally have more lenient credit requirements than conventional loans, making them accessible to a wider range of borrowers.
FHA loans often offer competitive interest rates, and the streamlined process involves a single closing for both the purchase and renovation, saving borrowers time and effort. The program also encourages energy-efficient upgrades, promoting sustainable and cost-effective living.
To qualify for an FHA Rehab loan, you must meet specific credit criteria. The FICO requirement for the lowest down payment on an FHA 203(k) purchase loan is a credit score of 580 or above, though lender standards may be higher.
After renovations, the property must meet FHA’s minimum property standards. It’s important to note that the before-renovation value is not a factor in the qualification process, rather it’s the after-improvement value lenders will be concerned with.
Lastly, you must intend to occupy the property as your primary residence, as these loans cannot be used to buy or renovate investment properties.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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