More and more consumers are becoming aware that two versions of the Federal Housing Administration’s 203k program from the U.S. Department of Housing and Urban Development are available for both new purchase loans and for current homeowners who choose to refinance.
When the Standard was first introduced, it was also available to several entities including investors. Now, a 203k loan can be used only by owner occupants, local governments or eligible nonprofits. An owner occupant, however, can use a 203k loan to purchase and renovate up to a four-unit building as well as a multi-use building in conformance with certain guidelines.
The two versions – the 203k Standard an 203k Streamline – basically work the same way, yet the Streamline is limited to a maximum of $35,000 in repairs and, by definition, requires less paperwork and oversight. The renovation must begin within 30 days of the closing of the loan and must be completed within the time frame established in the loan agreement. The total time for renovation must not exceed six months.
Other than the $35,000 loan ceiling, another big difference consumers should consider before determining which 203k version is best for them is livability. The Standard 203k loan does allow for up to six mortgage payments to be included in the renovation funds to cover the period when the home is uninhabitable during renovation. A Streamline 203k, however, cannot be used if the home will not be habitable at any time during the renovation.
Unlike the 203K Standard, which calls for a consultant to monitor the work and see that funds are dispersed as each step of the rehabilitation is finished, the Streamline can be completed with just two cash draws – 50 percent for supplier or contractor to get started and 50 percent upon completion. The total mortgage balance can exceed the purchase price of the property.
So what work can be done under the Streamline version? According to FHA, here is a comprehensive list:
Conversely, here is a list of improvements that are ineligible for financing with a Streamline 203K loan yet fall under the Standard guidelines:
In a capsule, the Streamline lives up to its name – less paperwork, easier to approve, simplicity of draw schedules. The Standard handles the bigger jobs. Both loans can be a boon for those looking to buy and rehabilitate before moving into the house. But does it pay to refinance with a 203k if you plan to stay put?
According to a new study conducted by the Housing Finance Policy Center at the Urban Institute, approximately 2.4 million borrowers with FHA loans could lower their mortgage costs because their existing interest rate is higher than today’s rates. With a 203k, borrowers could get a lower rate and a nicer home.
Subscribe to the Morning Review newsletter
Get the day’s top headlines delivered to your inbox every morning by subscribing to our newsletter.