Home Improvement Loans Offered by FHA
Repairs Preventing Refinance?
There are two types of home improvement projects. The first type is not necessary, but very much needed. Examples of this type of project might be a new kitchen, remodeling bathrooms, new carpet or paint, or landscaping your yard.
The other type of home improvement project is one where the repair is necessary to make the home livable. Examples of this would be exposed wiring, or studs in the wall, a gutted kitchen or bathroom, or ripped up flooring or carpet with only the sub floor exposed.
You can always burn through your savings to do these repairs or improvements to your home, but that might leave you with an empty savings account, and no guarantee that it will not turn into a bigger project than you originally expected.
The other way to do home improvements is to use your home’s equity to reinvest into the property, and in turn increase the value of the home by upgrading it to a mostly new condition.
Whether you want to do home improvements to make your home more comfortable to live in, or if you’re trying to increase the value of your home so that you can sell it for a higher price, FHA offers several options for accomplishing your goals.
How a FHA 203k Rehab Loan Works
The FHA 203k loan insures mortgages covering the purchase or refinancing and rehabilitation of a home that is at least a year old.
A portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed.
The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.
During the loan process, the amount of the loan designated to cover the cost of your approved repairs is held in an escrow account. The money is then distributed by the lender to the contractor doing the repairs as progress is made on the repairs.
An inspection is required at each stage of the distribution to the contractor to insure the the work is being done as agreed.
FHA 203k Streamlined Home Improvement Loan
Also known as a rehabilitation loan, the 203K streamlined loan is available to do less extensive repairs and improvements to your home no less than $5,000 up to, but not to exceed $35,000.
Repairs that would normally prevent you from qualifying for a standard FHA, or conventional home loan, can be financed as part of your refinance using this special loan program.
The types of improvements that borrowers may make using FHA 203k financing include:
- structural alterations and reconstruction
- modernization and improvements to the home’s function
- elimination of health and safety hazards
- changes that improve appearance and eliminate obsolescence
- reconditioning or replacing plumbing; installing a well and/or septic system
- adding or replacing roofing, gutters, and downspouts
- adding or replacing floors and/or floor treatments
- major landscape work and site improvements
- enhancing accessibility for a disabled person
- making energy conservation improvements
For home improvement, or rehab projects that will exceed $35,000, borrowers will use the FHA 203k Standard loan. The 203k Standard loan has many more restrictions than the Streamline version of the program. Be sure to consult your 203k lender to determine which program will best fit your home improvement needs.
FHA Title 1 Home Improvement Loan
Title 1 Home Improvement Loans are different from a 203k in many ways. A FHA 203k loan is a first mortgage that includes the cost of your home improvements, and a FHA Title 1 loan is a second mortgage that can be used with any first loan program, and does not require that you refinance your home to qualify.
The FHA Title 1 Home Improvement Loan program offers many benefits not available through traditional financing options.
- No Equity Requirements
- 100% Up-Front Funding
- Flexible Payment Terms with Fixed Interest Rates
- No Prepayment Penalties
- No Appraisal Necessary
- No Seasoning Requirements*
- Interest May be Tax-Deductible
- Up to $25,000 for a Single Family Residence
- Up to $12,000 per unit, up to $60,000 for a five-unit property
- Primary Residence, Vacation Homes and Investment Properties
*New residential structures must have been completed and occupied for a minimum of 90 days