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Buying a Fixer Upper? Here’s How to Apply for an FHA Rehab Loan

December 20 2018
by Leisl Bailey

Fixer upper house with a FHA rehab loan

Deep down, we all kind of want to be Chip and Joanna Gaines. They’re cute, they’re fun, and they’re really good at their jobs.

The Waco-based pair made fixers uppers chic again through their hit HGTV show of the same name. The premise of the show can be best described in these four easy steps:

  • Buy the worst house in the best neighborhood.
  • Pay significantly below your maximum budget.
  • Invest the rest of the money into extensive renovations.
  • Enjoy your dream home!

Purchasing a fixer-upper is a bit different than buying a house to flip. This is because when you buy a fixer-upper, especially when you plan to use an FHA loan to finance it, you are purchasing it as a single-family, owner-occupied home. This means that you aren’t just fixing the home up to sell it – you are fixing it up to truly make it yours.

FHA Loan Requirements

FHA stands for Federal Housing Authority, a partner of the United States Department of Housing and Urban Development (HUD).

These mortgage loans have some of the best interest rates. They are to help every day Americans purchase a home, even if their credit scores are not the best. If a borrower defaults on an FHA mortgage, then the HUD pays the balance to the lender and takes possession of the property. This guarantee is what makes it possible for people with bad credit or lower income guarantees to purchase property.

Here are the requirements for qualifying for a FHA loan in 2018:

  • 10% down payment of the purchase price with a credit score of 500-579
  • 5% down payment of the purchase price with a score of 580+
  • Appraisal completed by an FHA-approved appraiser.
  • Mortgage insurance (MIP) purchased
  • Proof of steady income via recent tax returns, W2’s, and paycheck stubs
  • Two years of employment at the same company.
  • At least 18 years old
  • Must make the home the primary residence

As you can see, these requirements make it fairly easy for anyone to purchase a home, as long as they are putting in the effort and working to build up their credit and employment history.

Other than their qualifying terms, these mortgages function very much like a conventional loan. You put money into escrow at the beginning of the process, an FHA lender underwrites your application, and you can have home inspections and appraisals completed as well.

There are many different types of FHA loans. Here, we’ll talk about the one that lets you channel your inner Fixer Upper.

FHA 203k Loan

There is also another type of loan that could be a good fit for you. Whether you are completely redoing your current home or planning to buy a home that needs a bit of work, then the Federal Housing Administration’s 203k Rehabilitation Mortgage Insurance Program could be for you.

The 203k program differs from a standard loan a little bit. This is because it combines renovation and purchase or renovation and refinancing costs into one easy to manage the mortgage.

What does an FHA 203k Loan do?

When you’re tight on cash, it can be really difficult to manage paying for a new home’s down payment and closing costs on top of your moving expenses. So, what if we told you there was a loan that combines all of these elements together so that you can pay them off over the lifetime of your loan instead of just in one big sum when you move? Well, guess what?

The FHA 203k Loan can do that for you!

You can also use the interest on the loan as a tax deduction, even though you are planning to use a portion of the loan for home renovations. If you simply paid for the renovations out of pocket or on a personal credit card, then you would not be able to deduct any of the interest for tax purposes. This makes taking out the FHA 203k loan a significantly more attractive option.

FHA 203K Loan Options

The 203K loan is very similar to its sister, the standard FHA Loan, but because of the renovation component, you can expect this loan to be a little bit less straightforward.

To make things easier for you, we’ve broken down the loans into two easy to digest types: the standard option and the streamlined option.

Once you know how much you intend to spend on your renovation (and what it is that you plan to do, exactly), you’ll know which loan is the better choice for you.

Here’s how they compare to each other:

The Streamlined FHA 203k Loan

If you choose this option, then this loan limits the amount you can spend on repairs to $35,000. With this option, it doesn’t matter how much the home is worth, this is the hard cut off for the limit. However, there is actually no minimum amount of money you have to spend when using the streamlined loan.

So, if there are just a few smaller repairs that you want to make around your house, no worries! You can use the loan to cover them, combine paying them off with your mortgage payments, and avoid having to spend the cash.

The “minimum and maximum” spends are not the only rules that you have to follow when you take out this kind of loan. All of the repairs that you plan to use the money to make need to be started within 30 days of the date of loan closing. They also must be finished within six months, so you need to make quick work of it!

Because this is a government loan, there are also a few restrictions on just how fancy you can get with your choice of materials and home improvements. You can’t build a swimming pool, an addition, or a fancy back patio. You can only do functional upgrades like updating your floors and counters, installing new appliances, and replacing the roof, windows, and siding.

The Standard FHA 203k Loan

This is the perfect loan to use if you intend to do any bigger projects. This is because there is a minimum spend amount for this loan. It is $5,000. You have a little bit more flexibility with what you spend this loan on as well. Pretty much any project is allowed—as long as you can prove that it adds value to your home. You can make an addition to your house, or completely remodel your kitchen or master bathroom.

However, as always, there are still a few exceptions. You can’t add a hot tub or a swimming pool, among other things. At least, not with this loan. Be sure to talk to your mortgage lender about the exact terms of your loan before you begin spending any of the money. This step is particularly easy because in order to be qualified for this loan, you have to partner with a HUD-approved consultant. This person is responsible for inspecting your loan and making sure that it follows all of the guidelines.

If your renovation makes your home uninhabitable for a period of time, then you can even finance a maximum of six months of mortgage loan payments into the loan while you live in an alternate accommodation.