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WHAT
IS A FHA REHAB LOAN?
ALSO KNOWN AS THE FHA 203(k) LIMITED REPAIR PROGRAM TO ASSIST BORROWERS
WITH BASIC REPAIRS
Borrowers can purchase or refinance their home and include the costs to
rehabilitate and repair it in the same loan.
FHA's Streamlined 203(k) program permits homebuyers to finance up to an
additional $35,000 into their mortgage to improve or upgrade their home
before move-in. With this new product, homebuyers can quickly and easily
tap into cash to pay for property repairs or improvements, such as those
identified by a home inspector or FHA appraiser.
The purchase
of a house that needs repair is often a catch-22 situation, because the
bank won't lend the money to buy the house until the repairs are complete,
and the repairs can't be done until the house has been purchased.
HUD's 203(k) program can help you with this quagmire and allow you to
purchase or refinance a property plus include in the loan the cost of
making the repairs and improvements. The FHA insured 203(k) loan is
provided through approved mortgage lenders nationwide. It is available to
persons wanting to occupy the home.
The
downpayment requirement for an owner-occupant (or a nonprofit organization
or government agency) is approximately 3% of the acquisition and repair
costs of the property.
The
203(k) loan includes the following steps:
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A
potential homebuyer locates a fixer-upper and executes a sales
contract after doing a feasibility analysis of the property with their
real estate professional. The contract should state that the buyer is
seeking a 203(k) loan and that the contract is contingent on loan
approval based on additional required repairs by the FHA or the
lender.
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The homebuyer then selects an FHA-approved 203(k) lender and arranges
for a detailed proposal showing the scope of work to be done,
including a detailed cost estimate on each repair or improvement of
the project.
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The appraisal is performed to determine the value of the property
after renovation.
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If
the borrower passes the lender's credit-worthiness test, the loan
closes for an amount that will cover the purchase or refinance cost of
the property, the remodeling costs and the allowable closing costs.
The amount of the loan will also include a contingency reserve of 10%
to 20% of the total remodeling costs and is used to cover any extra
work not included in the original proposal.
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At
closing, the seller of the property is paid off and the remaining
funds are put in an escrow account to pay for the repairs and
improvements during the rehabilitation period.
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The mortgage payments and remodeling begin after the loan closes. The
borrower can decide to have up to six mortgage payments (PITI) put
into the cost of rehabilitation if the property is not going to be
occupied during construction, but it cannot exceed the length of time
it is estimated to complete the rehab.
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Escrowed funds are released to the contractor during construction
through a series of draw requests for completed work. To ensure
completion of the job, 10% of each draw is held back; this money is
paid after the lender determines their will be no liens on the
property. |
FHA HAS LOAN LIMITS :
click here for
FHA loan limits
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