Interest for 203K construction loans are on the rise as buyers are learning its benefits from lenders and realtors. This program not only creates great value for home buyers, but it allows buyers to put their own design, décor, and amenities into the home they are purchasing.
The HUD 203K program is a construction loan that is combined with an FHA loan into a single loan and comes with all the benefits that FHA loans offer, including low interest rates and a low down payment, to mention a few. What’s more, the loans can be used for either purchase or refinance. “Anyone desiring to do home improvements right now is not going to find a better value,” says Will Johnson, a 203K consultant.
Single detached homes, multi-tenant, and mixed-use properties are all eligible for the 203K loan program. Condos were recently added to the list of eligible properties.
The list of allowable improvements is very broad. It includes room additions; kitchen and bathroom remodels; and electrical, plumbing, heating, A/C, and roofing repairs or replacement. It’s so broad, in fact, it even allows for houses to be taken down to the framing and rebuilt.
Two improvement lists are typically generated: the “wish list” by the buyer and one encompassing HUD minimum guidelines for health and safety that’s created by the 203K consultant. The property must be habitable upon completion. The two lists are combined into one list for contractors to bid on.
Initially two financial issues must be considered, the loan qualification and the valuation process. The buyer consults with the lender based on credit and financial review what the loan amount they will qualify for. If the loan qualification does not meet the total costs, then the construction bid may have to be reduced. The construction bid still must retain HUD health and safety issues.
Once a finalized construction bid is complete, it’s forwarded to the 203k consultant and lender for the valuation process. The mortgage maximum needs to be calculated to underwrite a 203K mortgage loan. It’s principally based on the appraisal with improvements (construction). The mortgage maximum is based on the 110% of this appraisal.
HUD offers two types of construction loans.
203K Streamline is tailored for simpler improvements like painting, new flooring, replacing new fixtures, or other enhancements costing less than $35,000. The advantages of this loan are that 50% of the funds are released upon close of escrow and no 203K consultant is required. But the customer will have to fund the remainder of the loan and be paid at the completion of the project. No moderate structural improvements are allowed. Lenders may require additional conditions based on the complexity of improvements.
The
203K Standard is for construction loans over $35,000. A HUD 203K consultant is required to oversee the entire project. Release of construction funds are paid through draws based on completed work. It’s best to contact a 203K consultant as soon as you decide that you want to participate in the 203K program.
The 203K consultant’s primary role is to assist and oversee the entire process from initial feasibility to final draw inspection. The consultant is hired by the buyer, but are the eyes and ears for HUD. It is also beneficial to the buyer to have someone experienced (consultant) in working with general contractors, to ensure quality, integrity, and that deadlines are being met.
