The FHA makes it possible to remodel your existing home or purchase a new home and remodel it with the proceeds of the loan. This program, called the 203K loan, is a great way to get the funds you need with only one loan for the purchase/refinance and remodeling of the home. The standard 203K loan process is rather complicated and can take a long time to complete, but the 203K Streamline process is much simpler and easy to complete. The difference between the two programs is the amount of money allowed for the remodeling. 203K Streamline lenders will maximize your changes at $35,000 in order to qualify for the program. If you are making non-structural changes to a home, $35,000 can allow a great deal of remodeling without the headaches of the standard 203K loan.
203K Streamline Rehab Loan Application Process
The application process for the 203K Streamline loan is different than any other loan type. The main difference is the approval needed for the money you will need for remodeling. Because there are no structural changes allowed on this program, you will not need an architect, engineer, or loan consultant. You will not need to draw up plans either, but you will need to provide a basic list of the changes and proposed contractors providing the changes to obtain loan approval. The appraiser uses the proposed changes to provide a current value as well as a proposed value with the new changes. Along with the list of changes, the lender will require the estimates from the contractors you plan to use in order to ensure the charges are within reason and that the contractors possess the qualifications to complete the work. Once you complete the application, 203K Streamline lenders will pull your credit to ensure you qualify for the loan. The minimum score allowed for this loan is 580 according to the FHA, but each lender has their own minimum that they allow, so shop around with various lenders if you find one that will not approve your credit score.
Underwriting Process for FHA 203K Streamline Refinancing
Once your application is approved and your credit score is high enough to move on with the process, you will move into the underwriting process. During this process, in addition to the proof of the changes you desire to make are the standard documents you will need to provide for the underwriter to determine the level of risk of your loan. These documents include:
- Proof of your income including pay stubs, W-2s, and/or tax returns for self-employed borrowers or borrowers on commission based income
- Proof of your debts, which most lenders use your current credit report to obtain, but if you have any debts not reporting on the credit report or not reporting correctly on the report, you should provide proof of those debts at the time of application
- Proof of discharge of any bankruptcies or foreclosures
- Proof that the home is going to be owner occupied
- Proof of assets for the down payment and/or required reserves
The 203K streamline lender then uses the documents you provided to determine your risk level. In general, they require the following conditions:
- The ability to put 3.5% of the purchase price of the home down
- A debt ratio lower than 43% on the back-end, meaning the total amount of your debts per month cannot exceed 43% of your monthly qualifying income
- All Chapter 7 bankruptcies must be discharged for at least 2 years
- All Chapter 13 bankruptcies must have proof of timely payments and the approval of the trustee to take on another debt
- All foreclosures must be discharged for at least 3 years unless you have certain conditions that allow for an exception, such as a serious illness or injury that made you unable to work and provide income to keep your home
- Proof of no more than 2 30-day late payments on your mortgage for the last 12 months
Once the lender approves your financial conditions for the loan, they must approve the changes you propose for the home. A few changes that are allowed under this program include:
- Roof repairs and/or replacement
- Furnace or A/C repairs or replacement
- Plumbing repairs or replacement
- New paint inside or outside
- Changes to make the home more energy efficient
- Bathroom or kitchen remodels that are not structural
- Addition of a porch, patio, or deck
- Basement finishing without any structural changes
- Septic system repair or replacing
- Changes to make a home more accessible for a disabled person
- Window repairs or replacement
The 203K FHA Mortgage Closing Process
The main difference for 203K Streamline lenders occurs during the closing of the loan. The funds you receive to make the changes on your home are not handed over to you; the lender holds on to the funds until specific disbursement periods occur. These periods are determined during the initial loan process and receive your approval as well as that of the designated contractor to ensure that everyone is on the same page. The costs you incur for the 203K Streamline loan are similar to those of any other loan. You will pay costs that include origination fees, underwriting fees, processing fees, title insurance fees, recording fees, and even credit report fees. All of these costs must be paid at closing as the funds for the loan are used for remodeling your home.
At the closing, the funds to purchase the home itself are disbursed to the seller, as they would with any other loan. If you are refinancing your loan, the 1st mortgage you currently own will be paid off and the remaining funds will be put into an escrow account. If the contractor requested money upfront in order to start the remodeling, especially if money is needed for supplies, that amount of money is disbursed; the rest of the money is held in the escrow account. The total amount disbursed at the closing cannot exceed 50% of the funds reserved for the remodeling. The remaining funds are disbursed upon completion of the project. Typically, the lender will need to inspect and approve the changes before any money exchanges hands. The exception to that rule is if the changes are less than $15,000. If this is the case, you are able to release the money upon approval of completion of the project. You will need to sign a document releasing the funds and approving the work. The lender will ensure that there are no liens placed on the house from any contractors or subcontractors as well before the money is released.
203K Streamline lenders offer you the ability to make significant changes to your home without putting a lot of your own money down on the project. If you are purchasing a home, a 3.5% down payment and a maximum of $35,000 in changes can be yours with this easy to obtain loan. The FHA makes it very easy to become a homeowner and now you can own a home that has the changes you desire!