Making changes to your home costs money. Many people assume they need a home equity loan in order to afford the changes. While this loan type does give you the cash necessary to make changes, there is another loan option – the FHA 203K Refinance Loan. You do not have to have an FHA loan currently in order to refinance into this loan. However, there are two types of FHA 203K loans available. Understanding how each one works can help you make the right choice for your situation.
The Two Types of FHA 203K Refinance Loans
There are two types of FHA 203K refinance loans – the type you choose depends on the changes you make:
- FHA 203K Streamline – This pared down rehab loan allows you to make some changes to your home, but nothing major. In short, you can make up to $35,000 in renovations and none of them can be structural changes.
- FHA 203K – The standard 203K loan allows you to make as many changes as you wish as long as they provide value to the home. There is no dollar amount and the changes can be structural.
The main difference between the two programs aside from the structural versus non-structural changes is the need for a loan consultant. The streamline 203K does not require the use of a consultant. The lender handles the inspections and disbursement of the funds. A full 203K, on the other hand, requires the use of a loan consultant, which adds to your fees. The consultant oversees the entire process from application through completion of the renovations.
Qualifying for the FHA 203K
Qualifying for both the FHA 203K Streamline and standard loan work much the same as an FHA loan.
- Loose credit score guidelines – Generally, a score over 580 is sufficient for this FHA program. The FHA does pay close attention to your last 12 months of credit history. If you have late payments within that time period, they may hesitate to approve you for the 203K loan. If your payments are on time during this period, however, you have a good chance at approval.
- Stable job history – Lenders like to see a 2-year job history, but will accept a shorter history if you have proof to show it was a positive change. In any case, you must provide the last 2 paystubs, last 2 years’ worth of W-2s and tax returns, and a Verification of Employment verifying you work where you say you work.
- Lenient debt ratios – Right now, the FHA allows a 31% debt ratio on the front-end and a 43% ratio on the back-end. This means your new mortgage payment may not exceed 31% of your gross monthly income and your total monthly debts with the new mortgage may not exceed 43% of your income.
Property Requirements
In addition to you qualifying for the 203K loan, your property must also qualify. Your loan approval does not depend on the current appraisal, though. Instead, it focuses on the proposed value after the changes you plan to make. In order to come up with this number, the lender, appraiser, and contractor must work together. The contractor provides the bids and the write-up of the proposed changes. The lender looks them over and passes them along to the appraiser. The appraiser then determines how much value each change will add to the value of the home. If the value is high enough, putting your LTV no higher than 96.5%, the property may be eligible for the program.
Streamline 203K Changes
The FHA Streamline 203K allows you to make changes that do not change the structure of the home. They also cannot total more than $35,000. However, you can make some significant changes despite the stipulations. A few examples include:
- Repair/replace the roof
- Finish the basement without any structural changes
- Change the flooring
- Make energy efficient changes
- Remodel the kitchen or bathroom with no structural changes
Keep in mind, any changes you make under this program must not require blue prints or the use of an architect. The contractor must be able to do the work on his own. The work must be done within 6 months and you must be able to live in the home while the contractors complete the work.
Full 203K Changes
The full 203K does not have stipulations like the streamline 203K. With this loan, you can conduct major changes, such as room additions, fixing structural damages, complete kitchen or bathroom remodels, or finishing the basement with structural changes. After you determine the changes you want to make, you can work the loan consultant to see if they are feasible. This is called the feasibility study and is where the loan consultant and appraiser work together to see if the value will be high enough after you make the changes to the home.
If the appraiser approves the changes and the lender approves the loan, the loan consultant handles the work from here on out. The loan consultant works as a neutral third party between you, the lender, and the contractor. He can do the negotiating for you, inspect the work to make sure it is done up to par, and disburse the funds for the lender. The loan consultant has your back in the process to ensure that you are not taken advantage of during the process.
Choosing the Contractor
Depending on the types of changes you wish to make, you may have a long process ahead of you. The streamline 203K goes a little quicker because you do not have to involve the loan consultant. Either way, the process works in a similar fashion, though. You apply for the mortgage, discuss the proposed changes you wish to make, shop for a contractor, and submit the bids to the lender. The lender then helps you choose the right contractor and draws up the contract between the lender and contractor. This is the most important part of the entire process. You need a contractor that understands the 203K process. He must be able to provide quality and timely work and be able to handle the agreed upon disbursement dates. Working with a reputable contractor that has done 203K work before usually works the best.
The FHA 203K refinance loan is a great way to make changes to your home without taking out a second loan. With one mortgage payment, you can minimize the interest you pay and gain more equity in your home faster. The 203K loan is just as lenient as a standard FHA loan. You do not need exceptional credit or a really low debt ratio. Average borrowers often qualify for this great home remodeling loan that helps you make your home look just how you want it.
