203K Loans Make Renovations Affordable

With the housing market’s recent history, it’s not surprising that so many consumers have never heard of the FHA Section 203K loan. This is essentially a construction loan backed by the government, but it requires some red tape and paperwork. When money was easy to come by, there was no reason for anyone to apply for this kind of loan. Now that many abandoned homes sit on the market, many with damage from being left uncared for, 203K is becoming a viable option again.

Consider homes in colder climates. Owners have been evicted and the banks often fail to secure the property for the winter weather. As a result, pipes freeze, causing water damage and plumbing damage that must be repaired. A potential homebuyer can take advantage of a 203K to buy the home at a rock-bottom price and repair the damage. It lets those who otherwise would not qualify, borrow money to buy a house and renovate it. These loans are a kind of future value financing that protect lenders from high risk borrowers.

Many types of properties qualify for these loans, including existing homes, demolished homes, single dwellings to be converted to multi-dwellings and more. The loan can even be used on some “mixed use” properties where part of the building is a storefront or other business.

Those seeking Section 203K loans must undergo an on-site inspection, done by the borrower, the lender, a consultant, a contractor and an appraiser. The consultant determines the improvements needed as does the contractor to price the cost of improvements. The appraiser determines if the future value of the home will be enough to cover the cost of improvements.

If all goes well, the loan is partially funded to purchase the property. The remainder is placed in escrow and funds are withdrawn from the escrow account as needed. At each stage, the consultant signs off to approve the renovations.

Improvements for luxury items are not allowed, but additions, porches and other traditional add-ons are covered under the program. Certain health and safety regulations must be followed before completing the improvements and securing the final disbursement.

The 203K can also be used to complete a refinancing deal on a home that needs improvements, but primarily is used by low-income individuals buying their first homes. These borrowers benefit from interest rates that are lower than typical home equity lines of credit.

Given that the market is likely at bottom, the future value of almost any home should rise. This makes qualifying for the loans easier for many buyers. To understand more about 203K loans and get full details on qualifying properties and renovations, visit http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm.