Can You Combine Home Renovations In a New Mortgage?
When you obtain a mortgage loan for a residential property, the loan will be approved based off of the value that the home was appraised at. Essentially, you will receive a loan in accordance with the condition that the home is in at the time. Most mortgage lenders will ask you to complete any renovations before you close.
With that said, you can obtain a loan from the FHA (Federal Housing Administration) 203(k) Loan Program if you are seeking to buy or refinance a home with renovation in mind. By doing so, the lender will base the loan off of the repaired value.
Pros Of Utilizing This Loan
In many cases, people will obtain what are known as bridge loans or interim loans to renovate the said homes before getting ahold of their long-term mortgage loan. When you obtain a FHA 203(k) mortgage loan, you are able to combine renovations into your financing. Not only does this help keep costs of applying for multiple loans down, but it also saves you tons of time in the other case where you would be filling out multiple loan apps.
Another advantage is that you have a 3.5% down payment based off of the home’s value. This is far better compared to the 15% average of traditional mortgage loans. They also allow those with lower credit scores to apply. Anyone with a credit score higher than 640 can qualify.
Who Is Eligible For This Type Of Loan?
There is a small list of eligible property types when it comes to the 203(k) loan. Those properties include:
- Single-Family Homes
- One-To-Four Family Properties With Original Foundation
- Modular Off-site Units That Can Be Moved To A Property
- Single Units Converted to Two-To-Four Units
- Demolished Properties Where Original Foundation Is Still In Tact
What Can You Renovate With The 203(k) Loan?
The repairs that you do with a 203(k) loan must be done by a licensed general contractor, meaning this loan is not for the DIY crowd. The renovations approved by this loan include roof and gutter replacement, HVAC repair, electrical, plumbing, painting, flooring, weatherization, and more.
You can also increase the number of living units, though they must be attached to the structure that already exists and you cannot build any more than four. If you do have a property with more than four units, you must reduce the number before applying for this loan.
If you don’t have a large home equity or a fair amount of cash upfront, applying for a 203(k) loan might be your best option when renovating your home. Always make sure to shop around to different lenders in order to get the best rate.
It will also be in your best interest to find a contractor who is experienced with 203(k) loans so that you can stay away from any future complications. Follow the correct steps and you can build the home of your dreams while paying off a mortgage that you can actually afford.
Do you have any experience with FHA 203(k) loans that you’d like to share? Let us know in the comments!