It's a seller market. Homes are scarce, and prices are high. But sellers are likely to discount homes that need repairs since they're harder to sell.
With the FHA 203k Loan, you can buy a run-down house for dirt-cheap, modernize it, and gain instant equity.
For example, Rosa wants to buy a fixer-upper for $200,000 and spend about $75,000 to make improvements. She needs to borrow money to purchase and renovate the house.
Her bank offered her a $190,000 conventional loan so she could buy the place, but they won't give her the money she needed to fix it up. The bank doesn't do renovation loans. They won't extend a home equity loan either because the property has no equity.
"Sure, I don't have equity now, but the place will be worth more after improving it," Rosa explained to the bank's loan officer. She's disappointed that the bank turned her down. The house is perfect for her. It's a sensible investment, too, because the listing price is well below the market value.
The FHA 203k Rehab Loan might be your solution.
Rosa came across some info about the FHA 203k Rehab Loan as she looked into other loan options. It's a home renovation loan with which you borrow the money to buy the house plus pay for the improvements.
The FHA 203k loan can be a perfect all-in-one purchase and renovation loan for home buyers. But not every home improvement plan is the same. Before you invest time and money, you should know if the 203k loan will work for you. Check out our 3-step guide for details: FHA 203k Rehab Mortgages.
This article will show you how to calculate the maximum mortgage for an FHA 203k loan. You'll learn how much buying and renovating a fixer-upper will cost using the FHA 203k loan. Let's use Rosa's scenario as an example. Of course, you can change the numbers to match your situation.
How to use the FHA 203k Loan Calculator.
Start by opening HUD's FHA 203k Calculator page. Next, you'll need to complete three steps:
- Add up the costs, fees, and reserves.
- Estimate the value of the property.
- Calculate the maximum mortgage.
Then, enter the property address, your name, and the loan features. If you don't know, then copy the information from my example.
Step 1: Repair Costs, Fees, and Reserves (FHA 203k)
The 203k rehab loan comes with extra fees and reserve requirements. Contingency reserves are additional funds set aside to cover unforeseen project costs. They can total 10% - 25% of the cost of your rehab project.
Fortunately, you can roll the fees, reserves, and repair costs into the loan amount.
A. Repair and Improvement Costs and Fees fall into seven categories:
- The Costs of Construction, Repairs, and Rehabilitation come from the contractor's estimate. If you don't have a proposal from a contractor, then use your best guess at how much a contractor will charge you for material and labor.
- You'll pay Architectural or Engineering Professional Fees only if you choose to use an architect or engineer to help with your plan.
- 203k Consultant Fees range from $400 - $1000. The consultant visits the property to perform a comprehensive review of the project. Then he prepares a Work Write-up and makes sure that the contractor completes the job as planned.
- Draw Inspection Fees pay the 203k consultant for periodic site inspections. Site inspections ensure that the contractor does quality work and stays on schedule. Depending on the size of the project, you could have five draw inspections at most. Each is $150. Typically, you only need 1 or 2.
- Title Update Fees protect you and the lender from subcontractor mechanic liens. We order a title update after each draw inspection at $125 each.
- Enter the Permit Fees unless the contractor includes them in the estimate. Find out who gets the building permits early because you can't start work without them.
- Get a Feasibility Study if you have no idea what repairs to make. The 203k consultant charges an extra $100. Otherwise, you don't need one.
B. Financing Contingency Reserves are usually 10%, but they can be up to 20% of construction costs - A1. The reserves pay for unexpected items and cost overruns. After you finish the project, we will refund you the unused reserve account balance.
C. Financeable Mortgage Payments Reserves. If you don't want to live in the construction zone, you can add up to six months of mortgage payments to the loan amount and use it to pay for temporary housing.
D. Financeable Origination Fee is for setting up and managing the escrow account. It will cost $350 or 1.5% of the loan amount, whichever is more.
E. Add Step 1's Total Rehabilitation Cost to your FHA 203k Loan amount.
Step 2: Establishing Value, As-is, and After-improved.
The lender considers two property values when calculating the maximum mortgage for an FHA 203k loan, the "as-is" and the "after-improved." In Step 2, I'll show you how the lender established both values.
A. The Purchase Price is the amount of cash you agree to pay the seller for the house. The purchase price is typically the As-Is Value - 2E. "As-is" means what it's worth now before you make repairs.
F. Enter the Appraised Value (after completing the improvements). For now, use an estimate of the property's value after finishing the repairs. The lender will update the number after reviewing the appraisal report.
Be realistic. Don't expect the property value to increase by the amount you spend on repairs and improvements. In other words, you probably won't get a dollar-for-dollar return on your investment right away.
If you have no idea how much the place will be worth after improving it, ask a real estate agent for help. The agent will complete a comparative market analysis for you.
Step 3: Calculate the Maximum Mortgage.
Complete Step 3 to see how much you can borrow.
Take the lesser of:
A. The As-Is Value (the purchase price of the house)
B. Or the After-Improved Value multiplied by 110%. You can borrow up to 110% of the after improved value of the house. The appraiser comes up with the after-improved value when reviewing the 203k consultant work write-up or the contractor's bid.
D. To get your base mortgage amount, multiply the lesser of A or B by 96.5%.
E. Make sure your base loan amount isn't more than the FHA Mortgage Limit for the county where you're buying the house.
F. Congrats! You calculated the Base Mortgage Amount for your FHA 203k loan.
Set realistic expectations when you do a 203k Rehab Loan.
Understand that the 203k loan has limits. Your renovation project might not fit within the program limits. Test your scenario by running it through the 203k Mortgage Calculator early so that you don't waste time or money on a project that won't work.
Carefully consider the extra work that goes into a renovation project—dealing with consultants, contractors, and lenders might be more than you bargained for.
Ready to start on your home renovation project?
When you're ready, assemble a team of experts, starting with an experienced loan officer. Few are 203k experts. The loan officer will pre-approve your FHA 203k mortgage so you know exactly how much you can afford.
Next, find a real estate agent to provide a realistic, comparable properties analysis for the "as-is" and "after improved" values. Then, interview contractors until you find someone you trust. Finally, try an online remodeling tool like Kukun to help you plan and budget.
Questions? Talk to one of our 203k experts.
Schedule a call with me, and let's talk about your project.
Want to know even more about the 203k Rehab Loan and FNMA HomeStyle Renovation Mortgages? Download our Complete Guide to FHA 203k Rehab Mortgages.