If you’ve been thinking of purchasing or refinancing a home that is in need of repairs, the Federal Housing Administration (FHA) 203(k) rehab loan might be of interest.
There are two types of 203(k) mortgages: streamlined and standard. The streamlined version is for smaller projects and is a less-involved process.
Purchase and refinance transactions work similarly to one another in that the process starts with both an appraisal of the after-improved condition, and contractor estimates. Once values are determined, and the existing structure plus the improvement costs will support those values, the next step involves an FHA consultant.
The consultant, required by all 203(k) lenders, oversees the project on behalf of both the lender and the buyer, or in the case of a refinance, the homeowner.
Once the FHA consultant has inspected the property and reviewed the project plan, the loan process moves forward.
The verification process includes checking out the general contractor who will be doing or overseeing the work, and ensuring that the contractor has a line of credit. Third parties must be doing the work, as opposed to you or people you know in the trades, so the lender knows the work is getting done by qualified people and that the draws that the lender sends are being used for their intended purposes. Draws are given out at certain points in the process, and some money is withheld until the end to make sure all the work is done. Contact your mortgage professional for more details.
With all the talk these days about mortgage insurance, now may be a good time to understand what it is and how it works.
First, homeowners insurance, also known as hazard insurance, is different than mortgage insurance. Hazard insurance is taken out by a homeowner to insure the property itself. Mortgage insurance is a policy that lenders take out to insure themselves against you defaulting on your mortgage. Some conventional and most Federal Housing Administration FHA) loans carry mortgage insurance.
All conventional loans where the loan-to-value ratio is greater than 80% will require some type of mortgage insurance. This insurance is paid monthly with the mortgage payment, and the rate will vary based on the loan-to-value ratio.
Existing homeowners who had more than 20% equity but now have less than that due to declining property values and are looking to refinance may still be in luck.
Many of the refinance programs that are available, specifically on mortgages that were insured by either Fannie Mae or Freddie Mac, have provisions where mortgage insurance can remain off the loan.
Check with your mortgage professional for more details.
FHA loans have two types of mortgage insurance associated. The first is called the upfront mortgage insurance premium. This fee can be financed and is 1% of the base loan amount. If you borrow $100,000, your loan will carry a premium of $1,000, making the amount you borrow $101,000. Then you will still have a monthly mortgage insurance premium. A 30-year, $100,000 loan would have a monthly mortgage insurance payment of $70.83. This is calculated by multiplying the loan amount of $100,000 by .0085 and then dividing by 12. Some FHA 15-year mortgages have the monthly mortgage insurance waived.