The FHA Streamline 203K loan is the perfect way to purchase/refinance a home and make changes to it without having multiple loans. The streamline process makes it a quick and easy loan to obtain. You do not need to use a loan consultant or have any blueprints. As long as your contractor is approved, you meet the minimum credit and income requirements, and you work with the lender and contractor closely, you can have the home you desire and only one loan to pay off. The loan provides you with money to purchase/refinance a home as well as make changes to it that total less than $35,000. The “extra” funds meant to help remodel your home are held in an escrow account until the predetermined disbursement dates, at which point the lender will disburse the funds as they see fit.
How to Qualify for a 203K Streamline Loan
Qualifying for the streamline 203K loan is as simple as qualifying for a standard FHA loan. These loans are known for their easy to meet qualifications and flexible guidelines in the event that something were to be a little “off” from standard guidelines.
Typically, the minimum credit score allowed for the 203K program is 580, but just like any other program, there are exceptions to the rule. If you have a solid reason for having a lower credit score and can prove that it was a one-time occurrence (such as a job loss) and have made positive changes since then, you may find a lender that is willing to grant you an exception. The general score for FHA as a whole for this program is 580, but lenders can impart their own requirements since they are the ones funding the loan, the FHA just guarantees it if you were to default on it.
Negative Credit Issues
If you have had a bankruptcy or foreclosure, you may still be eligible for the streamline 203K program. The FHA has some of the shorter waiting periods in terms of getting a loan after a bankruptcy or foreclosure. Typically, borrowers must wait 2 years after the date a bankruptcy was discharged for any FHA loan and 3 years after a foreclosure or short sale. There are exceptions to this rule, however. If you can prove that your bankruptcy and/or foreclosure was a result of a job loss as a result of the downturn the economy took and that you have picked up the pieces and moved on, you may only have to wait 12 months to get a loan. You will have to be able to prove that your income decreased at least 20 percent during that time and that it lasted for at least six months in order to qualify for this program, which is called the “Back to Work Program,” which includes the 203k program.
Just like a standard FHA loan, you should have two years’ worth of income to show for your streamline 203K loan. Lenders prefer the income to be from the same job for the entire two years to show income/job stability, but as long as the income is from a company within the same industry, you will likely be able to use it. If you are self-employed or work on a commission basis, you will need to provide 2 years’ worth of your tax returns. The lender needs to see all schedules so he can figure out your qualifying income based on the items you write off as a result of being a business owner or even an independent contractor.
The streamline 203K loan works just like an FHA loan in regards to the down payment. A minimum of 3.5 percent is required in order to get the loan. This 3.5 percent is calculated based off of the amount of money you need not only for the purchase of the home, but also from the money needed to make the changes. The total amount you can add to the purchase of the home and still remain in the streamline program is $35,000, so if you took the maximum amount for repairs or remodeling, you would need to put down an additional $1,225 on top of the amount of money you need to purchase the home.
The appraisal for the 203K program works a little different than any other type of loan. The appraiser will come up with 2 values for the home – one “as is” value which is the value of the home before any changes are made and then a future value, which is an estimated value of the home after you have the desired changes made. This is what the lender uses to qualify you for the loan and to approve the work that the money will fund. If the changes do not affect the value of the home, the lender will not be able to approve them as a part of the mortgage loan.
The streamline 203K loan allows different changes than the standard 203K loan. This loan is geared towards changes that are cosmetic or minor in nature. They cannot be structural and they cannot exceed $35,000. You can do remodeling, such as remodeling a kitchen or bathroom, as long as no walls are being knocked down or any other structural changes are taking place. You can do things like change out the roofing, paint the home, add a patio, change out the plumbing, or bring the electrical in the house up to code, just to name a few. The things that are not allowed, aside from the structural changes include:
- Any landscaping changes
- Adding a pool
- Any changes that take longer than a 6 month period
Choosing the Contractor
The lender you use for your streamline 203K loan does not need to be approved by the lender, so to speak. There is no comprehensive list of the allowed contractors, although it is to your benefit to use one that has experience with this program. What the lender has a say in, however, is how much the contractor charges and whether or not he is qualified for the job. It is in your interest to find a few contractors that you like and submit their paperwork to the lender. The lender needs to see that the contractor is experienced, licensed, insured, and has good referrals. In addition, the lender needs to review their cost estimates to ensure that they were within the standard limits and that the contractor will be able to uphold the estimates he provides while completing the work in a timely manner.
Typically, the streamline 203K program does not require you to have a formal inspection. If the costs of the work you had done are under $15,000, you can inspect the work yourself and let the lender know the work is satisfactory so that the funds can be disbursed. If the costs are between $15,000 and $35,000, however, the lender will need to inspect the work to ensure that it is done satisfactorily before they will disburse funds to the contractor. Typically, lenders will disburse 50% of the funds up front if the contractor needs them and hold the remaining funds in an escrow account until the final inspection by yourself or a representative of the lender takes place.
The streamline 203K program is one of the easiest ways to rehab your home if you only have minor or cosmetic changes to make. Because it is offered by the FHA, you can typically find competitive rates and easy to qualify for guidelines, making it easy to make your home look just the way you want it and only have one mortgage to pay.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.