Homeowner Renovations With FHA Refinance Loans
How these homeowners choose to pay for this work depends greatly on their financial goals and needs, but some borrowers will choose to simultaneously refinance and repair their real estate using an FHA Rehabilitation refinance loan.
FHA 203(k) Rehab loans are perfect for those who need to do large or small projects (there is a smaller version of the 203(k) Rehab Loan for those who do not need to do major work on load-bearing walls, etc.) and the 203(k) Rehab loan is available in both a new purchase version and a refinance loan.
That means you can refinance and use funds from that refinance for approved upgrades. Note that the FHA 203(k) Rehab loan is not the same as a cash-out refinance mortgage.
You cannot take cash back on the rehab loan the same way you do with cash-out refinancing, and the renovation money you are approved to use cannot be used except for those purposes spelled out in HUD 4000.1 and by lender requirements.
But if you need to do certain rehab work AND want cash back, the FHA Cash-Out Refinance is a more flexible option. Some borrowers want to add items like a new swimming pool or a barbecue pit, and FHA Rehab loans don’t allow the use of those funds for luxury additions.
But the FHA Cash-Out refi option lets you use the cash you get back on the loan for any purpose; this is the better bet for refinancing to pay for a pool or barbecue.
Remember that when using FHA Cash-Out Refinance loan proceeds to remodel, you have the option of being your own contractor and doing your own labor. Depending on your choice of lenders for an FHA Rehab Loan, you may not be allowed to do your own renovation work and the contractors you do use must meet FHA requirements.
That’s another reason why some choose cash-out refi loans instead of FHA Rehab Loans; there are fewer requirements. But those who do choose FHA Rehab Refinance Loans could have more borrowing power depending on how old the original mortgage is and other factors.
It’s always a good idea to have a participating lender compare these two kinds of refinance loans and show you how they differ and what the advantages might be based on your goals for the loan.
It’s also a good idea to shop around for a different lender just in case there are more competitive rates and terms available to you from another financial institution. You are not required to use the original FHA lender, but you are also not obligated to switch lenders if the one you use now offers you a better deal than elsewhere.
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