203k Rehab Loans

Basics of Massachusetts FHA 203k Rehab Loans

Have you found that “almost perfect” home in the right location that is selling at a reduced price because it needs a little rehab work?

Unfortunately, most mortgage loan programs require homes “in need of work” to be complete before the financing can be secured for the purchase transaction.

Whether the property needs a little or a lot of work, most First-Time Home Buyers simply don’t have the up-front cash to invest in a property prior to actually securing the financing.

However, the FHA 203k Rehab Loan may be your answer to turning that “fixer-upper” into your dream home.

The FHA 203k Rehab Loan is a popular mortgage program designed for buyers that want to finance the cost of home improvements into a new loan.

The financing for this loan will include the purchase price, as well as the improvements you are either required to do to be able to live in the home, or that you want to do, such as upgrade the kitchen, bathroom, etc.

This is also a great loan program for agents trying to sell homes that need repair. Buyers will have an option to complete those repairs and upgrades without a large upfront financial commitment.

Think of this as a one-time close construction loan.

At closing, the seller receives their money and the rest is put into an escrow account for the buyer to use for rehabbing the property.

The Massachusetts FHA 203k Renovation Loan is a great option for borrowers in Cape Cod who are looking to purchase a home that needs work. A borrower can obtain an FHA 203k Renovation Loan for most renovations that can add value to their Cape Cod home as well as cover other needed expenses associated with the renovation such as permits, labor and material costs as long as the borrower is intending to live in the home as a primary residence.

There are two different kinds of Massachusetts 203k Loans; a Standard Massachusetts FHA 203k loan and a Streamline Massachusetts 203k Loan. The standard loan is more suited for properties that need major (structural) repairs, such as the streamline 203k loan suits properties that need cosmetic repairs (non-structural). The streamline 203k loan allows for a max of $35,000 above the purchase price needed for improvements, whereas the max for the Standard FHA 203k loan is of 110% of the purchase price (or the cost of repairs, whichever is less).

---

The Benefits of Massachusetts FHA 203k Renovation Loans

The 203k loan program has many advantages, one truly unique feature and benefit of a 203k loan that stands out for borrowers is that the program allows for the borrower to include up to 20% contingency reserved for repair expenses that exceed their estimates. Additionally, the program also allows the borrower to defer payments for up to six months during renovation.

• Available for both purchase and refinance
• Flexible qualified credit ability to roll in most closing costs
• Able to use it for both distressed and non-distressed properties and major renovations
• Low down payment requirements
• Allows borrowers to borrow against the future value of the property once improvements are made.

Many Cape Cod homeowners believe the 203k Loan is only intended for rehabilitation, but that is not the case. The FHA 203k Renovation loan is also a great loan choice for a property that isn’t distressed but for homeowners who are simply considering remodeling.

Another reason the Massachusetts FHA 203k Renovation Loan is an excellent choice for Cape Cod home improvements is that the loan criteria allows the homeowners to borrow against the future value of the property once the improvements are made; opposed to the present value of the property like other loan programs.

If you’re considering renovating your Cape Cod property or simply perform a home improvement project and need a loan, you have many options to choose from.

One of the best programs available and specifically designed for rehab and home improvement is the Massachusetts FHA 203k Renovation Loan. It offers unique benefits that no other program has, so if you or someone you know is considering the purchase of a distressed property or perhaps a kitchen or bathroom renovation; have them look into a Massachusetts FHA 203k Renovation Loan.

Background of Massachusetts 203k Rehab Loans

The Federal Housing Administration (FHA) is a division of the Department of Housing and Urban Development (HUD). This program operates through FHA-approved lending institutions who then submits the applications to have the property appraised and have the buyer’s credit approved. These lenders fund the mortgage loans which the Department insures. HUD does not fund money to help individuals in the purchase of homes.

The Massachusetts FHA 203k Renovation program is the department’s main program in helping to rehabilitate and fix up homes. The purpose of this is also beneficial to communities and neighborhoods in the areas of revitalizing and expanding the opportunity for first time homebuyers.

Many lending professional have successfully utilized the FHA 203k program in association with local and state housing agencies as well as nonprofit organizations to rehabilitate properties. With this partnership, they have found ways to put the FHA 203k Renovation Program with other financial resources, such as Community Development Block Grant Programs ( HUD’s HOME, HOPE) at the same time to assist borrowers as well.

The Massachusetts FHA 203k Renovation Program is believed to be a great effective way for lenders to show their commitment to lending in lower income communities and to help meet their responsibilities under the Community Reinvestment Act (CRA). HUD is committed to increasing homeownership opportunities for many individuals in these communities.

---

Eligibility Requirements

FHA’s primary goal is to help borrowers purchase a home they may not otherwise be able to finance based on the down payment requirements of most conventional loan programs. To further that goal, FHA offers favorable loan terms, higher loan limits, and flexible down payment options to qualified buyers.

• Borrowers are not required to have a down payment or the income amounts that many conventional loan programs require, but you would normally still need to show evidence of a steady and verifiable income as well as good credit score.
• The credit qualification loan limits and other requirements for all FHA 203k loans are the same as regular FHA loans (a credit score of 640 or higher).
• Borrowers must be able to show the willingness and ability to repay the loan back, similar to regular FHA loans, the maximum loan amount is based on the location of the property.
• An appraisal is required but allows borrowers to borrow against the future value of the property once improvements are made.

---

Property types in Cape Cod eligible are:

• Most 1-4 unit properties and also single unit properties that will be converted to a multi-property.
• Individual condominiums can also be eligible properties for the FHA 203k loan program but must meet some additional requirements. A condominium can only be renovated on the interior; the exterior may not qualify for this program.

**The owner/occupant of the individual condominium can qualify while the investors cannot qualify for this program.

---

Eligible Residence Types

The Massachusetts FHA Renovation 203k Loan may be used for a second home or an investment property.

---

Loan-to-Value

A standard 203k loan program allows a loan amount that is 110% of the after improvement value determined by the appraisal. An FHA 203k Renovation Loan consultant is required to perform a thorough home inspection in order to do the complete work write-up.

A minimum of $5,000 must be borrowed for the sake of repairs. The maximum loan amount depends on the proposed appraisal value. All other qualifying guidelines are pretty much similar to other FHA loans.

---

Credit Scores/History Requirements

Although the 203k Renovation loan is flexible when it comes to credit scores and history, it is preferred that an individual may need a score of 640 or higher, this would be something to bring up to the lending professional.

---

Debt-to-Income Ratio Required

There are actually two different Debt-to-Income Ratios that underwriters will review in order to determine if a borrower’s monthly income is sufficient to cover the responsibility of a mortgage according to the particular lender/mortgage program guidelines.
Most loan programs allow for a Total DTI of 43% and a Housing DTI of 31%.

---

Two Types of DTI Ratios:

a) Front End or Housing Ratio:

• Should be 28-31% of your gross income.
• Divide the estimated monthly mortgage payment by the gross monthly income.

b) Back End or Total Debt Ratio:

• Should be less than 43% of your gross monthly income
• Divide the estimated house payment plus all consumer debt by the gross monthly income

Remember, the DTI Ratios are based on gross income before taxes. Cape Cod Lenders also prefer to use W2′s or tax returns to verify income and employment.

However, the adjusted gross income is used to calculate DTI for self-employed borrowers on most loan programs. Since there is room for interpretation on these guidelines, it’s important to review your personal income/employment scenario in detail with your trusted Cape Cod mortgage professional to make sure everything fits within the guidelines.