July 28, 2023
When shopping for real estate, most borrowers are thinking of the kind of mortgage such as the one known as an FHA 203(b).
That’s the loan you want when shopping for a house you want to buy as-is; one that meets FHA appraisal standards and requires little to no work on the property to make it eligible for a 203(b) forward mortgage.
Then there is another type of home loan option available to FHA borrowers; the FHA 203(k) rehabilitation mortgage, which allows you to buy a fixer-upper and have it brought up to FHA appraisal standards and local code requirements.
The FHA 203(k) rehab loan is suitable for both new purchase and refinance applications. Regardless of whether you buy or refinance with an FHA Rehab Loan, you are permitted to do major work, including altering load-bearing walls, etc.
There is even a limited 203(k) that restricts doing major structural work but can be used for smaller projects that don’t require as much cash or labor.
One loan or the other may be appropriate for your needs, but these two types of FHA mortgages are not interchangeable. You’ll need to know which loan is best for your needs.
Can’t decide? Maybe it’s a good idea to work with a real estate agent to see what types of homes are most popular in your housing market. If there are more fixer-uppers near you, the rehabilitation loan option may be best, assuming you find a suitable property.
Some housing markets have a lot of new construction and the 203(b) loan may work best in these areas unless you find a specific home that could use extra care.
There are some home loan assumptions it’s not safe to make. No matter which type of home loan you choose, keep the following things in mind:
FHA Home Loans Require An Appraisal
You can’t get a forward mortgage without an appraisal, even on a fixer-upper. Expect to pay for an appraisal even if you apply for a rehab loan.
FHA Loans Do Not Allow Excess Cash Back To The Borrower
If you get an FHA rehabilitation loan to purchase a fixer-upper, don’t expect to be given a lump sum of cash with no instructions.
Rehab loans have strict rules on how much cash can be withdrawn and to whom. You won’t be able to spend loan funds without accounting for them; the lender will require specific procedures and documentation.
The same is true for purchase loans that don’t require a rehab loan, but for FHA 203(k) mortgages, don’t expect unlimited or unrestricted access to loan funds except for specific needs of the rehab project.
FHA Rehab Loans And Occupancy
In general, all FHA mortgages have an occupancy requirement. Still, for those having rehab work done, there may be periods of time when the home is not habitable until the renovation work is complete.
FHA loan rules anticipate this and build in considerations for occupancy accordingly. You won’t be expected to take possession of a home that is not ready to live in yet.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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