FHA Programs for Fixer-Upper Homes

Many homebuyers choose to buy properties that aren’t exactly the “dream home,” but have the potential to be. They buy “fixer-upper” homes with the intention of renovating the entire house or parts of it. Some homeowners also decide to renovate their homes to get a better price for it when they sell. For some, this could mean updating the kitchen or adding a guest bathroom. For others, it could mean gutting and upgrading the entire home, room by room.

The FHA 203(k) Rehabilitation Loan

The fact is that repairs and renovations to your home cost a lot of money. Luckily, the FHA has an option for those with fixer-uppers on their hands. The FHA 203(k) Rehabilitation Mortgages allows borrowers to finance the funds for renovations to a home. This loan program can be used for purchasing a home, and if can also be secured as a refinance if you already have a mortgage on it.

In the case of a home purchase, the loan covers the purchase as well as the rehabilitation of the home, as part of a single mortgage. This loan can be used to finance a property that is at least one year old. Part of the funds go toward paying the seller, and the rest is placed in an escrow account, disbursed as rehabilitation goes on.

Additionally, the refinance option is not exclusively for FHA borrowers. If you need funds for renovation on a home you are currently paying off with a conventional mortgage, you can refinance to the FHA 203(k) Rehabilitation Mortgage.

The FHA Rehabilitation Loan comes with all of the flexible borrower guidelines that the FHA offers on its other mortgage and refinance programs. However, there are a few other factors that come into play. To qualify for an FHA Rehab Loan, the total cost of repairs must amount to at least $5,000. The FHA Loan Limits still apply, so the total value of the property must fall within the lending limits for that area. With Rehabilitation Loans, the property value is determined by whichever is less:
 

• The home’s value before rehabilitation plus the calculated cost of repairs, or 
• 110% of the appraised value of the property after repairs. 

The Limited Loan 

There are some remodeling projects that aren’t as extensive as others. You may not need an entire home loan to afford the renovations you have in mind. In that case, there is a “limited” version of the 203(k) Rehab Loan that lets you borrow without committing to the full mortgage. FHA's Limited 203(k) program lets borrowers finance up to $35,000 for renovations. 

To qualify for the limited version of the FHA Rehab Loan, the renovations need to meet some requirements. Here are some of the factors that disqualify a borrower:
 

• The renovation timeline is expected to be six months or more.
• The project requires more than two payments per specialized contractor.
• The required repairs in the appraisal require a consultant to develop a specification of repairs.
• The repairs require plans or architectural exhibits.

If you are considering an FHA Rehabilitation Loan, your best option is to speak to a lender about your options. Depending on the scope of repairs and/or upgrades, you might need to opt for the entire refinance rather than the limited version of the loan. Keep in mind that lender overlays apply, and that may affect your decision.

You may also be able to combine the FHA 203(k) Rehab Loan with other FHA programs, such as the FHA Energy-Efficient Mortgage option. Ask your lender about these add-ons, and see what the best course of action is for you and your home!

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