If you want to use some of the equity in your home for remodeling, but aren't sure that your credit score is high enough to qualify for a conventional loan, then you may have an option with an FHA 203 (k) loan. Guaranteed by the Federal Housing Administration, the FHA loan has many advantages.
What An FHA Loan Is
First of all, this loan allows you to obtain both a refinancing and the funds you need to remodel without having to get more than one loan. Having one loan can also mean far less paperwork and lower costs. The FHA loan is unique, in that it allows both for funds to repair or upgrade a home, as well as a refinancing option.
How It Works
The FHA loan can be used for any property having one to four units. If you are applying for an FHA for a townhome or condo, this loan can be applied to interior projects you plan to undertake.
The loan amount you receive will depend on where you are located. However, the FHA can get you a minimum of $5,000 and up to 110% of the value your home will be once improvements to it are complete. For smaller renovation projects, there is another version of the FHA loan, called the Streamlined FHA 203k which offers smaller amounts and a less involved process.
What You Can Do With An FHA
There are several ways the money from an FHA can be used. Purchasing a short sale or foreclosed home is one popular way to use the funds. Another is to make much-needed home improvements for the purpose of either increasing your home's value, or making life easier for everyone in your home.
There are some restrictions surrounding the nature and scope of the renovations you can do with an FHA loan, however. Any repairs must begin within 30 days of the closing of the loan, and must be completed within 6 months. As well, funds from an FHA loan must be used with a principal residence.
The FHA can be either a fixed or adjustable rate from a 15 to 30 year term. As well, this loan type sees slightly higher rates than a traditional FHA, and is not available to investors.
Qualification
Qualifying for an FHA loan follows the same basic process as other refinancing options. Your financial obligations, verifiable income and your debts will all need to be reviewed in order to obtain a debt-to-income ratio. Although this is only one of several parts of the FHA loan application process, it is a necessary one.
Those looking to qualify for the FHA loan must also keep in mind that there are several items which make up the total mortgage payment that will determine whether or not you can successfully pay it. These include, but are not limited to ground rent, hazard insurance, homeowners' association dues and escrow deposits.
Clearing The Confusion
The FHA loan process may appear to be confusing for the first-time applicant. There are several allowances and restrictions that may apply to you if you are thinking about an FHA loan. An alternative to trying to crunch the numbers by yourself may be to call the FHA and get a referral for pre-purchase counseling. Having expert advice can make all the difference when the goal is to be as prepared as possible before beginning the loan process.
Mortgage Refinance And Remodel At The Same Time?