FHA 203k Rehab Loans and VA Loans: Mortgages for the New Economy
Are you searching for a home and disappointed by the options available? Perhaps the home you can afford is too small for your requirements, or in need of extensive repair or upgrades. Two important federal government loan programs may be available for home buyers who qualify. These include VA Loans (Veterans Administration) for military personnel who have served in the Armed Forces and a 'fixer upper' loan, the FHA (Federal Housing Authority) 203k Rehab Loan. These two loans are reliable financing options for the new economy.
The FHA 203k program requires the home buyer use the property as a primary residence. The FHA 203k rehab loan cannot be used for investment property. The only exception to this rule is if the buyer is a qualified non-profit.
VA Loans are also designed for those seeking mortgage financing for their primary residence. New regulations for the VA Loans include lower credit scores and 100% financing.
Home Buying Guidelines for FHA 203k Loan Program
In the present real estate market, foreclosures are common. Many properties have been sitting empty or they were not properly cared for when owners lived in them. These properties are functional living spaces in need of repair or renovation.
Money is tight and home buyers are unable to obtain additional financing in addition to their mortgage for repairs and renovations. In response, the federal government has created the FHA 203k Rehab Loan so additional resources are available to qualified home buyers. "This is the only loan that some home buyers can afford when purchasing a home that needs renovations," says J. Mansisidor, V.P. Branch Manager of SunTrust in Williamsburg, Virginia.
The 203k Rehab loan adds another layer to financing a home. After a property is selected by the buyer in a desirable neighborhood, the agent conducts a preliminary feasibility analysis. This analysis lists repairs necessary, and tallies the cost of rehabbing the property. The real estate agent also estimates a final market value on the home after repairs. The feasibility analysis needs to be conducted prior to ordering appraisals or estimates, to determine if the cost is too high to make the purchase worthwhile for a home buyer and the lender.
The real estate agent and buyer will execute a contract to purchase the property if costs of repairs and home purchase are aligned with current market values. A home buyer must have a sales contract in order to apply for a 203k Rehab loan . Within the contract there is a clause stating the sale will be contingent upon financing through the government lending program. Home buyers apply for the 203k Rehab loan through an approved HUD lender. Once the application is complete, the buyer obtains written estimates for the repair work needed. HUD lists approved contractors and fee consultants on the organization's website.
Once the house is under contract and estimates are obtained, two different appraisals are needed. The first appraisal will be made on the current value of the home; the second appraisal will be an assessment of the value of the property after repairs are completed.
"The lender sets the loan at the value of the property when the repairs are complete," says Mansisidor. The mortgage cannot exceed the lesser of either the value of the home in its existing condition plus the cost of repairs and 6 months' worth of mortgage payments; or 110% of the estimated value of the home after repairs. The amount of the loan is also subject to maximum FHA mortgage limits, which vary from place to place.
Homebuyers may either hire a qualified contractor, or perform the repair work themselves. If the homebuyer completes repairs, the loan will only pay for materials. Leftover funds for repair can be used for additional repairs, or applied to the loan principle. Repairs must be completed on the home within six months of the purchase. The repair funds are distributed incrementally, and a HUD inspector reviews progress before more funds are released.
Homebuyers may close on the home with as little as 3.5% down. If the home cannot be lived in while renovations are in progress an additional six months of mortgage costs can be added to the loan so that the homebuyer may live somewhere else while repairs are being done.
VA Loans are a federal government lending program designed for Armed Force's members both active and reservist. The requirements have changed dramatically in the past few years. Previously, "credit scores were not required for VA Loans," says Mansisidor, "manual underwriting was applied to the VA Loan process.
Nowadays underwriters, loan officers, and lenders are more cautious. Most lenders now require a minimum 620 credit score. Mansisidor says in the majority of applicants who are approved VA Loans, "Debt to income ratio does not exceed 50%." He also cautions that "applicants should be two years removed from bankruptcy prior to their application date and there must be no late payments on debts for at least 12 months."
There are substantial advantages for those approved for VA Loans. "This is the only loan right now, other than first time homebuyer loans, that offers 100% financing," says Mansisidor. He adds, "No mortgage insurance is required for this loan because the government insures it. This can be a large savings, especially with VA jumbo loans."
The federal loan programs outlined above show that political leaders are working on improving the mortgage financing options available. Home buyers need to keep their credit scores, debt to income ratio, and objectives with home renovations in line with monthly earnings to ensure mortgage approval for both programs.
Elaine VonCannon is a REALTOR® with RE/Max Capital in Williamsburg, Virginia, and she specializes in retirement, relocation and residential and commercial real estate in Hampton Roads, VA and the surrounding areas.
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