FHA Rehab Loan Options You Might Consider
January 17, 2024
The FHA 203(k) rehabilitation mortgage is a type of FHA loan you can use to buy and renovate a home or refinance an existing mortgage and renovate the home simultaneously.
There are options you need to know and a few things that you should cross off your list of options, as we’ll explore below.
Buy or Refi?
As mentioned above, you can buy a new fixer-upper with an FHA 203(k), or choose to refinance your existing mortgage. The options for refinancing include the ability to refinance a non-FHA mortgage into an FHA loan, and you also can finance certain closing costs.
The FHA 203(k) purchase loan lets you get a house that would not pass an FHA appraisal if you were buying it with an FHA purchase loan called the 203(b), which most FHA borrowers use to get a suburban home.
The agreement is that your renovations will bring the house up to FHA minimum standards and state/local building code as a condition of loan approval.
Small Scale or Large?
FHA 203(k) loans allow you to select either a full version of the loan with authorization to do major work on load-bearing walls or a smaller version of the 203(k) loan, which still allows renovation but limits the scope of that work to less ambitious projects.
A limited 203(k) is better for homeowners who don’t have extensive work to be done but who still need renovations that a contractor can provide for a reasonable fee.
Finance Closing Costs or Pay In Cash?
You may be permitted to finance some closing costs, including the FHA up-front mortgage insurance premium, but financing any expense potentially increases your monthly mortgage payment.
It’s smart to know how much it would increase based on each add-on to the loan you may be considering.
Things to Cross Off Your To-Do List
FHA rehab loans don’t allow you to use FHA funds to pay for the installation of swimming pools, barbecue pits, or other “luxury items.”
What should you know about this rule? You could be authorized to use FHA loan funds to pay for the repairs of a pool or barbecue pit IF there is a safety issue or related problem, but these are typically handled on a case-by-case basis.
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There are options you need to know and a few things that you should cross off your list of options, as we’ll explore below.
Buy or Refi?
As mentioned above, you can buy a new fixer-upper with an FHA 203(k), or choose to refinance your existing mortgage. The options for refinancing include the ability to refinance a non-FHA mortgage into an FHA loan, and you also can finance certain closing costs.
The FHA 203(k) purchase loan lets you get a house that would not pass an FHA appraisal if you were buying it with an FHA purchase loan called the 203(b), which most FHA borrowers use to get a suburban home.
The agreement is that your renovations will bring the house up to FHA minimum standards and state/local building code as a condition of loan approval.
Small Scale or Large?
FHA 203(k) loans allow you to select either a full version of the loan with authorization to do major work on load-bearing walls or a smaller version of the 203(k) loan, which still allows renovation but limits the scope of that work to less ambitious projects.
A limited 203(k) is better for homeowners who don’t have extensive work to be done but who still need renovations that a contractor can provide for a reasonable fee.
Finance Closing Costs or Pay In Cash?
You may be permitted to finance some closing costs, including the FHA up-front mortgage insurance premium, but financing any expense potentially increases your monthly mortgage payment.
It’s smart to know how much it would increase based on each add-on to the loan you may be considering.
Things to Cross Off Your To-Do List
FHA rehab loans don’t allow you to use FHA funds to pay for the installation of swimming pools, barbecue pits, or other “luxury items.”
What should you know about this rule? You could be authorized to use FHA loan funds to pay for the repairs of a pool or barbecue pit IF there is a safety issue or related problem, but these are typically handled on a case-by-case basis.
------------------------------
RELATED VIDEOS:
Here's the Scoop on Conventional Loans
When Do You Need a Cosigner?
Analyzing Your Debt Ratio
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