As a buyer- how many times have you walked into a home that was perfect for you, but the carpet was old and you really wanted wood flooring. Or, you already own your home and love everything about it but those darn kitchen countertops. In the past, you would have to take out either a construction loan or a second mortgage to cover the costs. Two loans (possibly held by two different banks) at different interest rates. Whether you’re just buying a home or already own one, this can be a bit of a hassle. The FHA 203(K) Streamline renovation loan may be the solution for your dilemma. A single 30 year fixed rate loan with the home improvements included.
The first rule for the FHA 203(K) is that the owner must intend to occupy the home (this loan is also approved for 1 to 4 units as long as the owner occupies one of the units). Here are a few of the program’s benefits:
· Improvement Loan amount: $5,000 (minimum) up to $35,000 (maximum).
· Down payment as low as 3.5%
· Family members may pay all of the borrower’s required down payment, closing costs.
· No HUD consultation necessary- this is a vast improvement on the old FHA loans, it really speeds up the process
· Loan limits in
o Single home- $ 729,750
o Duplex- $934,200
o 3 Unit- $1,129,250
o 4 Unit- $1,403,400
Okay, so it sounds great, but what type of renovations are covered? This loan was designed for minor renovations not major ones. Some examples of allowed renovations are:
· Minor kitchen or bath remodels including new appliances
· Upgrades to the electrical or plumbing (very common in homes built before the 1970s)
· New paint, carpet or Hardwood floor installations
· New Air Conditioning or Heating
· Window replacement
Here are some of the things that are not covered:
· Major rehabilitation or structural repairs (things like relocating load bearing walls, room additions or new construction )
· Any repairs or upgrades that require architectural drawings
· Landscaping, pools, hot tubs or pool repair work.
Self help is also frowned upon for this type of loan. For example, if you want to paint (and are not employed as a professional painter), the most you can expect to be reimbursed for are the paint and some supplies. If you hire a licensed painter to do the work, the contractor can be paid for both materials and labor. This brings up some other important points:
· The money flows from the bank directly to the contractors.
· The work has to begin within 30 days of purchase.
· The entire project must be completed within 90 days of closing.
· The contractors are paid in two payments one at the beginning of the project and the second at the end.
These rules are in place to ensure that the work is professionally done, there are no misuse of funds, and that the proper lien releases are collected from the contractors once the work is complete. Because of the nature of the work to be performed, you don’t have to have a general contractor or consultant and plans (always verify this with the City permit office where you live). You can deal directly with subcontractors as long as they hold valid licenses for the contracted work.
Here area few suggestions:
1. If you are having more than one trade (type of contractor- plumbing, electrical or flooring for example), it’s my suggestion that you should hire a licensed general contractor. A general contractor can coordinate all product orders and subcontractor work. Ask your realtor or friends to recommend someone.
2. Always check to ensure that all contractors working in your home are hold a current license. You can check the license by going to the California Gov. Contractors State License Board website http://www.cslb.ca.gov/ and do an instant license check. Also ask for a copy of their insurance and call the company to ensure that the insurance is current.
3. Before you and your Real Estate agent put in an offer, make sure that your lender will write this type of loan. Most do, but it is much better to know in advance.
4. You will still need to qualify for the full amount. Let’s say that you qualify for a $300,000 home. If you put in an offer for a $300,000 and wanted to add $35,000 to the sell price, you would have to have your lender qualify you for the total $335,000 amount.
I always suggested to my clients that ultimately it is their responsibility to investigate on these types of issues on their own. But don’t be shy about asking professionals their opinions. You lender, Realtor and accountant can offer important insight on the subject.
Recent Comments