You own a home, but you do not love the way it looks right now. You would love to change the exterior paint or remodel your kitchen, but you do not hads. Rather than applying for a personal loan or even a home equity loan, try the 203K Streamline Refinance. This FHA program enables you to have funds to not only refinance your first mortgage, but also have the cash to make changes to your home. There are strict rules regarding this program, however, in order to keep it “streamlined.” Understanding the terms of this program can help you make the right choices regarding the changes you make.
The 203K Streamline Refinance Rules
As with any mortgage program, there are definite 203K Streamline Refinance rules. They are not as strict as the rules for the standard 203K, but you still must follow them in order to receive approval. The rules include:
- The repairs and/or changes you make cannot exceed $35,000
- There cannot be any structural repairs or changes
- There is no minimum amount you must borrow
- You must live in the property
- The contractors performing the work must complete it within 6 months
- You must be able to reside at the property while the contractors do the work, with the exception of a 30-day displacement allowance
- The contractors must start the work within 30 days of the loan closing
- No room additions or new rooms are allowed
- No type of landscaping work is allowed
The good news is that unlike with the FHA 203K loan, you do not need to use a loan consultant and you do not need an architect. If the work does require an architect, you would require the full 203K program.
The largest requirement of the FHA 203K Streamline Refinance is that the property is owner-occupied. You cannot use the program on any investment properties or second homes. Aside from the need to live in the property, the following properties are eligible for the program:
- Single Family Homes
- 1-4 unit properties as long as you live in one of the units as your own
Qualifying for the 203K Streamline Refinance
Just like any other FHA loan, with the exception of the FHA Streamline Refinance, you must prove the following factors to the lender to determine if you qualify for the loan:
- Income with your last 2 paystubs, W-2s for the last 2 years and tax returns if necessary
- Credit scores that the lender considers eligible (the FHA usually prefers the credit score above 640)
- Proof of payment of any recent collections or judgments
- Proof of discharge of any bankruptcies along with the necessary waiting period (2 years for Chapter 7)
- Proof of at least 3 years waiting period between any foreclosures you experienced and the 203K application
- Proof of timely mortgage payments for the last 12 months
The lender has the final say in what they will and will not accept since they fund the loan. The FHA is rather lenient in its guidelines, as they are with their standard loans, making it possible for many people to refinance their home and fix it up.
The Allowed Repairs/Changes
There are many different changes and repairs you can make to a home using the 203K Streamline Refinance. Following is a list of examples of the changes you can make:
- Roof repair or replacement
- HVAC repair or replacement
- Plumbing repair or replacement
- Septic system repair or replacement
- Minor changes for basement finishing that do not involve structural work
- Flooring repair or replacement
- Weatherization changes including door or window repair or replacement
- Addition of porches or patios
- Minor kitchen or bathroom repairs or changes
- Paint changes either interior or exterior
As long as the repairs/changes do not affect a load bearing wall and do not require blueprints from an architect or excessive work, they can fall under the Streamline program. Remember that the maximum allowed amount, however, is $35,000.
Choosing the Contractor
Just as is the case with a standard 203K, the lender will help you choose the right contractor. In order to start the process, you need to collect the following:
- Bids from various contractors with detailed listing of the work they will perform
- Proof of the contractors’ license and insurance
The lender will evaluate the bids to ensure that the costs are within the usual and customary amount for your area. They will also determine that the contractor has the experience and tools necessary to complete the work in the time allowed. Once you and the lender choose a contractor, you must execute a written contract that includes all of the details of the work to be done along with the costs that go along with it.
Every 203K Streamline Refinance requires a contingency reserve account. This helps lenders ensure that there are enough funds to pay for not only the detailed repairs as agreed, but also any unexpected issues that arise. If something comes up while the contractor performs the work, the money will be there to pay for the additional work that is necessary. This protects the lender and the borrower. If no issues arise, the remaining money goes back to the principal to help you pay it down.
Disbursing the Funds
The 203K Streamline Refinance works a little differently than a standard refinance at the closing. When you are at the closing, your new lender will pay off your current lender for the existing mortgage on the property. The remaining funds are the 203K funds that you will use to fix up your home. Unlike a home equity loan or personal loan, you will not receive the funds at the closing. Instead, the lender holds onto them in an escrow account. For the limited 203K, most lenders disburse 50% of the projected costs for the work to the contractors at the closing. The lender holds the remaining funds in the escrow account until the contractor completes the work. The streamline program only requires one inspection, which is the final inspection when the work is complete. Once you approve the work, the lender disburses the remaining 50% of the funds to the contractor – there are only 2 disbursements allowed in this program.
Just as is the case with any other refinance, you will need to secure an appraisal for the 203K Streamline Refinance. The difference with this loan program is that you will receive an as-is value as well as an after repairs value. The appraiser uses the bids from the contractors to determine the changes they will make to the home and how much they cost. The appraiser then comes up with a future value for the lender to determine if there is enough value to cover the cost of the repairs. Most lenders will allow up to 110% of the future value of the home for the 203K loan amount.
The main difference between the FHA 203K Streamline Refinance and securing a home equity loan is the fact that you have one loan. Generally, the interest rate is also lower on this loan since the FHA offers lower rates than many other loan programs. When you take out a 2nd loan, the lender takes a risky position being in 2nd position because the first lienholder gets paid off first. With a 203K loan, everything is in one loan; with the lower risk, the lender can provide a lower interest rate. This helps to make the loan more affordable, enabling you to make the changes you desire in your home without going over your budget.