You know the drill; you have been in your home for more than 10 years and suddenly you find out that you need a new roof. Knowing that it is a very expensive replacement, you start to wonder how you will ever make that happen. Should you take out a second mortgage? What if you do not have enough equity in the home? Maybe you should take out a personal loan? There are many possibilities, but one that often gets overlooked is the FHA 203K program that can help you with standard repairs like roofing, windows, and even utility replacement.
What is the FHA 203K Program?
The FHA 203K program is an FHA loan with a bonus. That bonus is the money you get to use to fix up your home. The process is a little daunting as you need to run all of the repairs/changes past the lender and get them approved and you also have to use qualified contractors that the lender approves for you to use, but in the end, it is well worth it. You get an FHA loan program, which means low fees, low-interest rates, and flexible guidelines and you get the money you need to fix up your home. The program is just one loan – you do not have to deal with two mortgages and there is only one closing. It’s a win-win for everyone.
How it Works
Getting the FHA 203K loan is similar to the process of getting any other type of loan. You fill out a standard loan application. At that time, you can tell the lender you wish to apply for the FHA 203K program so that he can run your application accordingly. They will pull your credit, evaluate your income, verify your employment, and get an estimated value of your home at the time. Once it is determined that you meet the minimum requirements for the loan, such as a high enough credit score, low enough debt-to-income ratio, and stable income, the lender can help you move forward with the 203K process.
The first part of the loan is the money used to pay off the balance of your existing mortgage. That part of the loan works just like any other loan during processing as well as at the closing. The lender will immediately pay off your existing lender and that lien will be released. The second part of the loan – the money used to make the repairs, works a little differently. Once the amount that you need is determined and the lender ensures that the amount you need fits within your debt ratio and LTV based on the future appraised value after the repairs are completed, you close on the loan and the extra money gets held in an escrow account.
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Getting the Work Done
Within 30 days of the loan closing, the work on your home must start. Most roofing companies will start right away, but if there is a delay, you must ensure that work begins within 30 days. Whether you are getting a new roof, windows, or utilities, the only money that will be put out up front is the money that the contractor requested up front before the closing. The contractor and lender will have a contract that will detail the work that is to be done, the costs that were agreed upon with the contractor, yourself, and the lender, and the disbursement schedule. In general, any money that is needed up front is for materials or for subcontractors. After that, the remaining money stays in the escrow account until the work is completed, unless a mid-work disbursement was worked out with the lender. Once the lender approves the work that was done and all mechanics’ liens are removed from the property, then the final disbursements will be made.
The FHA 203K program is a great way to put a new roof on your home without having too much out of pocket expense. FHA loans are not expensive and are easy to qualify for even if you have only “fair” credit. If you do not want to pay the FHA insurance premiums for the life of the loan, you can always refinance out of the loan in a few years when the value of the home appreciates and you can get a conventional loan without mortgage insurance. In the meantime, it is a great way to get the necessary repairs you need done on your home for safety, comfort, and even energy efficiency.
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