FHA 203k Rehab Mortgage
FHA 203K Rehab Mortgages
 

Finding the perfect home isn't easy. Before you compromise on the location, size, and condition of the next place you’ll call home, take a look at the FHA 203k rehab loan. It’s an all-in-one loan you can use to buy and renovate a house.

FHA offers two versions of the 203k rehab mortgage, the Standard 203k, and the Limited 203k. Use the Standard 203k for significant renovations that cost more than $35,000. The Limited 203K is for minor remodeling and repairs that cost $35,000 or less.

Buy a fixer-upper and transform it into a dream home. Negotiating a sweet deal on a house that needs work. Repair, modernize, build equity. The FHA 203k rehab loan can help you do it.

What to do before diving into a rehab project
 
        •   Get pre-approved for the 203k mortgage.
        • Choose a lender that has experience closing FHA 203k loans. Most lenders can’t do them. Shop around to find a HUD Approved Lender that actively originates FHA 203k loans. NewCastle has a 15 years track record of happy customers who closed renovation loans with us. Trust in our experience. You’ll get the support you need from our team of professionals so that you can buy and renovate a home without breaking a sweat.

          Interview the loan officer to make sure she's a 203k expert with hands-on experience. Ask her for a trial run and listen as she talks you through the details from start-to-finish. You should feel confident that she's qualified to guide you through an otherwise complicated process. Our 203k experts are all about supporting you from start-to-finish. We guide you step-by-step so you can stop worrying about the paperwork and start dreaming about your new place.

          Get pre-approved and be confident about your renovation project. Our 203k expert makes sure you’re eligible for an FHA loan. She checks your credit, employment, and financial history. Now you know that you can get the loan, how much you need for the down payment, and how much the house will cost each month. With your pre-approval in hand, you’re ready to zero in on the places you can afford.

          Our 203k mortgage pre-approval is the smart way to show home sellers and real estate agents that you’re willing and able to buy and renovate. Improve your negotiating power so that you can purchase the home you want at a fair price. Get pre-approved quickly and easily online, right now, even before you shop for a home.

        •   Find the right property
        • Use a real estate agent to help you find the perfect place to buy and renovate. An agent narrows down your search and prepares a comparative market analysis on the property you want to buy. A market analysis compares similar houses in the area that recently sold. It gives you a good idea of the future value after you finish the renovation.

          Schedule a showing with your real estate agent to check out the property. See how much work you’ll need to do and roughly calculate how much it’ll cost. Then subtract the cost from what you think the future value of the house will be after you renovate it. The difference will help you come up with a fair price to offer the seller.

          If the project is small and the improvements are mostly cosmetic, like kitchen cabinets and countertops, collaborate with your real estate agent and a few useful contractors to decide if the plan will work. If the repairs are extensive or if you have no idea how much it will cost to renovate, hire a 203k consultant to do a feasibility analysis.

          Check with your loan officer to be sure the property is eligible for an FHA 203k loan. Run the numbers by her to confirm that they pass muster. The loan officer uses your rough numbers to recalculate the estimated loan amount. If it changes, then she updates you with the revised mortgage payment, the amount of cash you need to close, and an amended pre-approval letter. You need a polished mortgage pre-approval that matches the dollar amount you plan to offer the seller. A resourceful real estate agent will use the pre-approval letter to negotiate a favorable deal for you.

        •   Make an offer to buy the house.
        • You're ready to make your offer. You’ve found a house you love, the rough numbers for the renovation seem to work. Use a standard Residential Purchase Agreement - a sales contract to prepare your written offer. Add a few particular 203k contingencies to the sale contract before you present it to the seller. Contingencies are vital because they protect you against losing your earnest money.

          Include a mortgage contingency statement. Let the seller know that you want to buy the house, but you need an FHA 203k loan to do it. Use these words: “The buyer applied for Section 203(k) financing. The contract is contingent upon mortgage approval and the buyer’s acceptance of additional required repairs as determined by the lender.”

          Set the mortgage contingency for 30 - 45 days, depending on the scale of your project. Your agreement to buy the house hinges on our loan approval. The lender needs more time to review, approve, and give you a firm mortgage commitment for a 203k loan. You or the seller may terminate the contract if we don’t commit to lend before the contingency expires.

          Add a home inspection contingency that expires 14 days after your offer is accepted. Hire a licensed inspector to examine the property thoroughly so that you know what you're buying. Consider using an FHA 203k consultant for the home inspection. If the home inspector finds defects that you and your agent didn't detect, then you have the option to negotiate for seller concessions, or you can just cancel the deal and get your earnest money back.

          Set clear expectations with the seller. Put a closing date on the sales contract that's at least 45 - 60 days after the seller accepts your offer. You need the time to put together a quality renovation project plan. Your team will need access to the property to work on your plan, including the real estate agent, the inspector, the 203k consultant, and the contractors.


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How to get approved for a 203k loan
 
      •   Apply for the 203k mortgage.
      • You're ready to apply for the FHA 203k loan after the seller accepts your offer to buy the house. Log into the Loan Dashboard and complete your application online. It’s easy to click-to-sign your Loan Estimate, upload a copy of your sales contract, and other documents we request from you. You can find a list of the items we need on the Loan Dashboard. Call the loan officer if you feel more comfortable applying by phone or face-to-face. Our experts are here to help you.

        The 203k loan has extra closing costs. By comparison, however, the fees are lower than any other rehab loan by far. You can roll most of them into the loan amount to reduce your cash out-of-pocket.

         Review the Loan Estimate to see your closing costs itemized. We give you a copy of the Loan Estimate instantly after you apply online. We send you updated Loan Estimates after you make changes to your loan. Changes sometimes happen after we receive reports from the 203k consultant, the appraiser, and a final bid from the contractor.

      •   Figure out how exactly much the rehab will cost.
      • Search HUD.gov to select a 203k consultant. The 203k consultant is a key player who oversees the rehab project from start to finish. Meet at the property, share your wish list of repairs, and tell him your plans as the two of you inspect the house. The consultant decides which repairs you must do and which repairs on the wish list that you can do.

        The consultant prepares a Work Write-up and Cost Estimate that details all the repair and costs for your renovation project. Review the Consultant Borrower Agreement to learn more about the consultant’s services and fees. Pay the consultant after he gives you a copy of the Work Write-up. Check the 203k consultant Fee Schedule to see how much his services cost.

        You don’t need the 203k consultant’s services if you do the Limited 203k program - when the cost of repairs is $35,000 or less. Still, you should consider using one. It’s a small price to pay for valuable advice.

        Choose your contractor carefully. Shop around for an experienced and licensed professional. The success of your project depends in large part on the contractor. He's responsible for completing quality work on time and within your budget.

        Let the contractor know that you are using an FHA 203k mortgage to pay for the renovation. Contractors typically want a partial payment upfront for materials. However, for many 203k loans, we can't pay a contractor before he completes his work - FHA doesn't always allow it. If the cost of repairs is $35,000 or less, we advance 50%, or $17,500 upfront when the loan closes. Otherwise, we pay the contractor after he completes the work.

      •   Get a firm mortgage commitment from the lender.
      • Order the appraisal online through the Loan Dashboard. After we get your order, we select an independent appraiser to inspect the property. The appraiser reviews the 203k consultant Work Write-up, the contractor bids, the property details, and comparable properties in the area. Then he establishes a future market value for the home - after you fix it up.

        As the lender, we use the appraisal to determine how much your house will be worth after the renovation so that we can calculate the final loan amount for your 203k mortgage. FHA rules put a limit on how much you can borrow. We run three calculations and cap your loan amount at the lowest.

          > The FHA loan limits.
          > 110% of the home’s value after improvements.
          > The home’s value before improvements plus the cost to renovate it.

        Your loan is approved! We give you a Mortgage Commitment letter to let you know that you're ready to close on your 203k loan. On the Mortgage Commitment, we list what we need from you before you close. Next, we deliver a Closing Disclosure at least three days before you close. The Closing Disclosure gives you the final details of the transaction. Carefully review the Mortgage Commitment and the Closing Disclosure. Talk with your loan officer and confirm the amount of cash you need to bring to the closing.


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How to use a 203k loan to rehab a house
 
      •   Close the deal.
      • Meet your loan officer and your real estate agent at the title company for your closing. Weeks ago your agent set out to find you the perfect home and help you buy it. Your loan officer walked you step-by-step through the loan process. Mission accomplished! Now it's time for you to seal the deal. Sign the papers, officially take ownership of the house, and commit to the 203k loan.

        Bring a cashier’s check, or if you wire money to the closing then take along proof of your money transfer. We transfer money to the title company too, but only enough for you to buy the home. After the title company receives the money they need to disburse, they cut a check to the seller of the property, and the seller gives you the keys to your home.

        We deposit the cash that you will use to renovate your house into an escrow account. One of the all-important documents you sign when you close is the Rehabilitation Loan Agreement. It lists the cost of each repair and covers point-by-point how we plan to pay out the money set aside in the escrow account.

      •   Make improvements to your house.
      • Start construction within 30 days after you close. It’s best to begins right away as long as you have your building permits in place before you break ground.

        After the contractor completes the first phase of the project, he requests a draw from the escrow account. The 203k consultant inspects the contractor’s work to make sure it’s complete and within budget. If everything checks out, you and the consultant sign the Draw Request and send it to us. We disburse all draws with checks payable to you and the contractor as co-payees.

        Repeat the process until the contractor finishes the job. If you have a big project, the 203k consultant divides it into five phases. In other words, you could have a maximum of four draw inspections plus a final after completing the rehab work.

      •   Finish your home rehab project.
      • For each draw, we hold back at least 10% to cover cost overruns. The amount we hold in the contingency reserve depends on the project details. It’s usually between 10% - 20% of the total renovation cost. If everything goes according to plan and you don’t spend the reserve money, we use it to pay down your loan balance after you finish the project.

        Finish the construction work. Sign a letter of completion to tell us that you’re satisfied with the results of your renovation. Schedule the 203k consultant to complete the final inspection. He confirms that the contractor did all the work according to plan. Sign a final release notice, request the draw so that we make a final disbursement from your escrow account to wrap-up your FHA 203k rehab.

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Our step-by-step guide will show you exactly how to buy and renovate a home so you can get started today.