Tips for Renovating a Home With an FHA Loan
October 7, 2023
Renovating a home using an FHA 203(k) rehab loan or its refinance loan equivalent is easier when you know what to expect from the process. There are some general guidelines to remember when planning for a renovation project, starting with choosing the right loan for your needs.
FHA Cash-Out Refinance or FHA Rehab Loan?
If you want to do FHA-approved upgrades to the home, including the addition of energy-saving features, an extra bedroom, or similar work, an FHA rehab loan may be the best bet.
But if you want to install a swimming pool, the FHA cash-out refinance option is a better loan to explore since there are no restrictions on using the money to renovate your home. With an FHA 203(k), you can’t add “luxury items” like a pool or hot tub.
Hiring Labor
If you want to remodel your house and work as your own contractor, you must show credentials or proof that you are qualified to do the work. Some lenders may not allow you to do the work, and it’s best to settle this issue early in the process. Lender standards will play a very important part in this area.
Renovation Loans Are More Complex
In addition to hiring a builder, you must also work out how to pay them for labor and materials. An escrow account is typically required, and using it with an FHA 203(k) rehab loan is more complex than simply using escrow to pay property taxes and other costs.
Builders are paid via “draws” from escrow when the money is needed at a particular stage in the process. This money does not pass through the borrower’s hands, and the borrower cannot take cash from the escrow account for non-mortgage loan use.
Get the Right Type of Rehab Loan
An FHA 203(k) rehab loan for typical purposes requires a minimum down payment.
But if you are in a federally declared disaster area and are applying specifically for a loan to repair or replace a home damaged in the disaster, you should apply for the FHA 203(h) rehab loan, which features 100% financing and no down payment required.
Know What to Expect When the Job Is Close to Being Done
Will you need an inspection when the rehab work is finished? How much do you need to budget for that work? What happens if there is a last-minute delay? Are you prepared for a large renovation project to experience cost overruns? If these issues sound unfamiliar to you, it’s wise to do additional research into the work you need to be done to see where delays and added expenses can creep in.
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Sometimes It Pays to Refinance
Don't Forget Your Closing Checklist
Your Home Loan is Called a Mortgage
FHA Cash-Out Refinance or FHA Rehab Loan?
If you want to do FHA-approved upgrades to the home, including the addition of energy-saving features, an extra bedroom, or similar work, an FHA rehab loan may be the best bet.
But if you want to install a swimming pool, the FHA cash-out refinance option is a better loan to explore since there are no restrictions on using the money to renovate your home. With an FHA 203(k), you can’t add “luxury items” like a pool or hot tub.
Hiring Labor
If you want to remodel your house and work as your own contractor, you must show credentials or proof that you are qualified to do the work. Some lenders may not allow you to do the work, and it’s best to settle this issue early in the process. Lender standards will play a very important part in this area.
Renovation Loans Are More Complex
In addition to hiring a builder, you must also work out how to pay them for labor and materials. An escrow account is typically required, and using it with an FHA 203(k) rehab loan is more complex than simply using escrow to pay property taxes and other costs.
Builders are paid via “draws” from escrow when the money is needed at a particular stage in the process. This money does not pass through the borrower’s hands, and the borrower cannot take cash from the escrow account for non-mortgage loan use.
Get the Right Type of Rehab Loan
An FHA 203(k) rehab loan for typical purposes requires a minimum down payment.
But if you are in a federally declared disaster area and are applying specifically for a loan to repair or replace a home damaged in the disaster, you should apply for the FHA 203(h) rehab loan, which features 100% financing and no down payment required.
Know What to Expect When the Job Is Close to Being Done
Will you need an inspection when the rehab work is finished? How much do you need to budget for that work? What happens if there is a last-minute delay? Are you prepared for a large renovation project to experience cost overruns? If these issues sound unfamiliar to you, it’s wise to do additional research into the work you need to be done to see where delays and added expenses can creep in.
------------------------------
RELATED VIDEOS:
Sometimes It Pays to Refinance
Don't Forget Your Closing Checklist
Your Home Loan is Called a Mortgage
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