When to streamline your FHA 203k loan

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:

Repair/replacement of roofs, gutters and downspouts

Repair/ replacement/upgrade of existing HVAC systems

Repair/ replacement/upgrade of plumbing and electrical systems

Repair/replacement of existing flooring

Minor remodeling, such as kitchens, which does not involve structural repairs

Exterior and interior painting

Weatherization: including storm windows and doors, insulation, weather stripping, etc.

Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwaves

Improvements for accessibility for persons with disabilities

Lead-based paint stabilization or abatement of lead-based paint hazards

Repair, replacement or the addition of exterior decks, patios and porches

Basement remodeling that does not involve structural repairs

Basement waterproofing

Window and door replacement and exterior siding replacement

Well or septic system repair or replacement

Conversely, here is a list of improvements that are ineligible for financing with a Streamline 203K loan yet fall under the Standard guidelines:

Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall

New construction (including room additions)

Repair of structural damage

Repairs requiring detailed drawings or architectural exhibits

Landscaping or similar “site amenity” improvement

Any repair or improvement requiring a work schedule longer than three months; or rehabilitation activities that require more than two payments per specialized contractor.

Improvements that require a plan reviewer

Improvements that result in work not starting within 30 days after loan closing; or cause the owner to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted. (FHA anticipates that, in a typical case, the borrower would be able to occupy the property after the loan closes.)

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.