Some houses listed for sale are not in top condition because of one or more needed repairs. These homes may linger unsold as prospective buyers perceive the repair issue as a major hurdle. Prospective home buyers can broaden their home search by including homes in need of repair that qualify for an FHA section 203(k) mortgage.
An FHA section 203(k) mortgage differs from a regular FHA section 203(b) mortgage in that an allowance is made for the cost of needed repairs. A home needing rehabilitation is likely to sell at a discount. Up to $35,000 of the amount borrowed through a 203(k) loan can be used for the needed repairs. The minimum amount of repair costs that may be included in a section 203(k) mortgage is $5,000.
Needed improvements
There are several different types of repairs that can be financed along with the purchase price of a home. Some typical rehabilitation costs that can be included in a section 203(k) mortgage include the following:
- Roof replacement
- Major plumbing repairs
- Floor replacement or repairs
- Improving access for a disabled occupant
Contractor escrow
A contractor is usually required to perform the needed repairs. FHA guidelines require that the repair work must commence within 30 days after the loan agreement is executed. The rehabilitation must be completed with six months of the loan date, unless your agreement calls for a shorter timetable. The repairs must be examined by an inspector approved by the FHA. Funds are then released from escrow after the repair work is inspected.
FHA guarantee limits
As with a regular FHA mortgage, the FHA does not actually provide the funding for a section 203(k) loan. The FHA guarantees the loan, which is made by a private lender. However, most mortgages are in compliance with FHA guidelines so that they remain readily marketable. Each county has a maximum valuation amount that the FHA will guarantee.
When determining if a property meets FHA limitations for a 203(k) loan, the value of the home is considered to be the lesser of the following amounts.
- The cost of repairs plus the value of the home before repairs
- 110 percent of the appraised value after completion of repairs
The use of a section 203(k) mortgage is not limited to home purchases. You may also use a section 203(k) loan to refinance your current mortgage and pay for needed repairs or improvements. Look into home loans with Best Rates Mortgage, LLC or another company that works with mortgages for more information about FHA-guaranteed loans.
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