Remodeling a home can get rather costly, which makes many homeowners skip the things they want to do most to their home. If you don’t have enough cash to make changes you desire and the changes are less than $35,000, you may qualify for the FHA 203K Streamline Loan. This loan, which is backed by the FHA, is a less complicated version of the standard 203K which requires the implementation of a loan consultant, many approvals by the bank before work can be completed, and specific draw periods that all contractors must agree to accept. The streamline version of this loan is a very relaxed and easy way to get the money for renovations you desire whether you are refinancing a current FHA loan or you are in the process of purchasing a home that needs some renovating in order to make it look how you would like it to look.
Basic 203K Streamline Refinance Guidelines
The FHA 203K Streamline Loan is backed by the FHA, which means all FHA guidelines prevail for this loan. The FHA sets their standards in order to insure the loan and then lenders may put their own requirements over those guidelines in order to make the loans less risky. According to the FHA, the following guidelines must be followed:
- Minimum credit score 580
- Minimum down payment of 3.5% of the purchase price of the home
- Stable income and employment must be documented with 2 current paystubs and the last two years’ worth of tax returns and/or W-2s
- Maximum debt ratio on the back-end is 43%, which means the total monthly debts cannot be more than 43% of the gross monthly income you bring in each month
- Any bankruptcies must be discharged for at least 2 years
- Chapter 13 Bankruptcies must be paid or currently being paid and in a timely fashion
- Foreclosures and short sales usually need to be 3 years behind you unless you have special circumstances such as a sudden injury or illness that made it impossible to make a living
- You must live in the property you are using the streamline program on
- Your mortgage history over the last 12 months must not contain more than 2 30-day late payments
These requirements, which are applicable for standard FHA loans are what lenders require for the FHA 203K Streamline program as well. As stated above, some lenders may require additional stipulations. For example, some lenders will not go as low as a 580 credit score because that demonstrates a lack of financial responsibility; many lenders will not go below 620 or 640, depending on their ability to take risks. Other lenders will require a lower debt ratio or will not allow self-employed borrowers – every lender has their own guidelines, which is why shopping around with various lenders is essential for this program.
Recent 203K Mortgage Program Changes
The FHA 203K Streamline Loan offers you the ability to make a large number of changes without the need for a loan consultant, architect, engineer, or any drawn up plans. Basically, any major changes to the home that would change the structure or require major construction, such as a room addition are not allowed. The Streamlined program is meant to provide you with an easy way to make minor changes to a home. Some of the approved changes include:
- Fixing or replacing the roof and/or gutters
- Replacing the furnace or air conditioner
- Replacing or repairing plumbing
- Changing out the flooring type (adding hardwood or changing the carpeting)
- Painting the home whether inside or outside
- Making energy efficient changes
- Remodeling a kitchen without making structural changes
- Weatherizing a home
- Adding a porch or patio to the exterior of the home
- Finishing a basement as long as there are no structural changes
- Repairing or replacing the septic system
- Making changes for a disabled person
- Stabilizing lead paint
- Replacing or repairing windows
Repairs not Allowed for the Streamline 203K
A few repairs that are not allowed under this program include:
- Landscaping
- Pools
- Any structural changes
- Any changes that require written plans
- Any changes that take longer than 6 months
The Disbursements
A major difference between the standard 203K and the FHA 203K Streamline Loan is how payments are disbursed. The streamlined loan only allows for 2 payments: one at the beginning and one upon completion of the work. The first payment cannot be more than 50% of the full cost of the repairs and is strictly meant to help the contractor obtain materials and other necessary items to begin the work. The final payment, including any reimbursement for permits that were obtained, will be released when all liens from contractors and sub-contractors have been released from the home and the home passes a final inspection (unless the changes total less than $15,000, then an inspection is not required). The payments are made directlyto the contractor that performed the work from the mortgagee, unless you have arranged to do the work yourself, which requires approval by the mortgage company. You must be able to prove that you are capable of the work physically as well as have the knowledge to perform the work appropriately. If this is the case, no labor fees are paid, strictly the material costs are reimbursed.
FHA 203K Inspections
The FHA Streamline 203K Loan differs from the standard 203K loan in its need for inspections. The standard 203K contains a great deal of paperwork as well as periodic inspections before any more money is disbursed and before anything can be signed off on. The streamlined program only requires one inspection, at the completion of the work and only if the cost of the work exceeds $15,000, but is less than $35,000. If the cost is below $15,000, the lender is able to take your word for it that the work is done to your satisfaction. You must also sign a release stating that the work is complete and up to your standards before the money can be disbursed to the contractor.
203K Streamline Appraisals
Every FHA loan requires an appraisal, and the FHA 203K Streamline loan is no exception. What is different about this appraisal versus a standard appraisal is that the appraiser will come up with two values for the home. The original value will be the home as it stands right now with no changes. The second value will be the forecasted value after all planned changes are made. Sometimes the appraisal for this loan will include required changes that the appraiser sees that would make the home insurable by the FHA. If there are changes that are necessary, they must be done first before any other changes can be made or the loan will not be insured by the FHA.
Max Loan Amount
The loan amount for the 203K loan will be based off of the appraisal as the borrower is able to add $35,000 of changes to the home. That $35,000 must include all fees, required changes to meet FHA regulations, and the 10-15% contingency reserves necessary for any last minute emergency changes that come about during the process.
Choosing the 203K Contractor
The lender does not have a large say in which contractor you use for the work on a FHA Streamline 203K loan, but they do need to approve the work estimates to ensure that they are within the reasonable and customary costs for the work being completed. The contractors will also need to prove that they are properly licensed and insured in order for the loan to be approved. Each estimate provided must include detailed information regarding
- Work plan
- Cost for each job being completed
- Contractor’s credentials
- Contractor’s experience
- References upon request
Once the contractors are chosen and the estimates are approved by the lender, the costs must be put in writing and signed by the contractor, stating that he agrees to do the work for the specified amount in the designated time frame.
The FHA 203K Streamline Loan is a great way to make minor changes to your home, whether you own it now or you are purchasing it. With very little paperwork and the ability to make up to $35,000 in changes, the ability to transform your home with a government backed loan is a great way to get the home you desire.