Older homes that need TLC and 203k loans

203k loans can help you purchase a home and do needed
repairs under the same mortgage.

Let's say, you have just spotted a charming antique cape cod cottage along a quiet tree lined street.  The sales price is loooooow, and if you squint, the house looks really good.  But, it needs a new roof and updated electrical.  You may be thinking, just move on by.  The price of the home, coupled with a second mortgage for the repairs, is out of your budget.

This is just the type of scenario where a 203k loan can come to the rescue.  There are two types of 203k loans, the streamlined 203k and the full blown 203k.  Both are designed for primary owner occupied dwellings and package the repairs and the cost of the house in the same fixed rate mortgage.  The appraisal on the house factors in the value after the repairs are done.  I recently sat down with Tom Murphy of Poli Mortgage group in Plymouth, MA who was kind enough to explain how this type of mortgage works.

Streamlined 203k loan:


The streamlined 203k is designed for repairs that do not exceed $35,000.  In fact, $30,000 may be a safer number to keep in mind since repairs sometimes run over budget.  The type of repairs that the streamlined 203k would cover includes kitchens, baths, electrical, heating, lead paint abatement, windows & doors, roofs, siding, and flooring.  These are repairs and updates to the existing structure and do not include structural repairs or newly framed additions.  The property can be a multi family as long as one unit is owner occupied.  Unlike the full blown 203k, the streamlined version does not require a FHA counselor.  The timing in order to close is not much longer than a conventional loan, about 60 days.

Full blown 203k loan:


Now we're looking at some major work.  The full blown 203k allows for more types of repairs including new additions, structural work, foundations, plus the types of improvements that a streamlined 203k would cover.  An FHA consultant is required to look over the plans and provide a  specification of repairs/work right up.  Basically, the consultant decides whether the work is feasible and whether the estimates are in line with the work to be done.  Sounds expensive, right?  Well, its not free.  The borrower pays for the consultant at a predetermined rate set by FHA depending on the estimated cost of repairs.  You may be looking at a charge in the $700 range.

Benefits:


The benefits to both 203k mortgages is that you can bundle the cost of repairs in with your mortgage allowing for the purchase and immediate repair of older homes.

This encourages the restoration of historic homes which is a benefit to the environment (in keeping with the motto: the greenest building is the one already built).

The rates are as low, or sometimes lower than other loans.  At the time of this post, the rate is under 4% and is 1/4% lower than conventional loans.

You can refinance with a 203k loan and include your improvements as well.

The timing (for a Streamlined 203k) is about the same as a conventional loan

Drawbacks:

With 203k loans, as with all FHA loans, you are required to pay PMI for 5 years.  After that time, if you have enough equity, you can petition the bank to allow you to drop the PMI.

With the full blown 203k, you will have the additional expense of the FHA consultant.

With the 203k, the timing will be a bit longer than a conventional loan.

Other Considerations:


Work must be completed within 6 months.

There is a maximum amount that may be borrowed.  This is determined not only by the projected finished value of your property, but also by the maximum loan amount which is determined by the county that you live in.  For Barnstable county it is $462,500 for a single family.  For Plymouth county it is $523,750 for a single family.  Multi families have higher maximum amounts.

For more information, visit HUD's 203k informational page or Streamlined 203K page.

Tom Murphy from Poli Mortgage group (MLO# 12318) is experienced with this type of mortgage and would be happy to answer questions: 508-274-2102.