Scared to buy a fix-upper house? We get it. When you walk in a place where carpet is perhaps soiled, the roof might be leaky or there might even be some holes in the wall, it can be downright intimidating. But don’t let the seemingly daunting nature of a home renovation deter you from pursuing a loan to buy this home. Home renovations – if done correctly – can actually be quite fun. Yes, they tend to be on the expensive side, but that’s the whole point of seeking a home renovation loan. Not only does it cover the cost of the property; it covers the renovation expenses, too. Up next are some important things to know about home renovation loans through Fairway of the Carolinas.
Although informally known as a home renovation loan, its formal name is FHA 203(k) loan. Like other FHA loans, the FHA 203(k) loan is backed by the federal government – specifically, the Federal Housing Administration, which Congress created in 1934. The FHA later created FHA 203(k) loans to encourage mortgage lenders to fund seemingly risky home purchases. The end goal was and is to spur neighborhood revitalization and more homeownership opportunities.
Designed for houses that are damaged or need rehabilitation, an FHA 203(k) loan covers not only the cost of the property but also the cost of necessary home repairs. This loan funds a wide array of repairs, including bathroom remodeling, roofing, flooring and air conditioning systems. An FHA 203(k) loan will also include up to 20% in “contingency reserve.” This ensures the funding to complete the remodel even if it ends up costing more than anticipated. The remodeling funds include parts and labor. Just keep in mind that a licensed general contractor must perform the work.
The bottom line
There are two types of FHA 203(k) loans: regular and streamlined. Streamline 203(k) loans are for homes that don’t need structural repairs. These loans also have limits on the amount of renovations being done.
To qualify, homeowners must plan to live in the home they are repairing. Some other important things to note about home renovation loans:
- Existing construction must be at least a year old
- Single-family, two-family, three-family and four-family dwellings all qualify
- Condos are FHA 203(k) loan-eligible if they’ve been approved for FHA loans
- Buyers must have a minimum credit score of 640
- The maximum loan amount is $271,050 in the Charlotte area