Using a Section 203(k) Loan to Remodel Your Home
Whether its your existing home or a fixer-upper on the market that caught your eye, financing the cost of a remodel can be done through a federally insured loan. Section 203(k) is a HUD program through the FHA that helps keeps down the cost of a remodel through a lower interest rate and long-term repayment options. Here is some important information to bear in mind about a Section 203K loan.
How does a Section 203(k) loan happen?
A Section 203(k) loan is done as part of refinancing an existing mortgage or purchasing a new home. Part of the funds are used to pay the purchase price of the home or pay off the existing mortgage, and the rest of the funds are placed in an escrow account to be distributed to the contractor as they complete phases of the work. In order to prepare an estimate for the loan amount and assure that the work is on track and compliant with the Section 203(k) rules, the homeowner must work with a HUD Consultant who charges a separate fee.
Are there limits on Section 203(k) loans?
The qualifications for a Section 203(k) loan are fairly simple. The home must be at least one year old, and be the residence of the borrower (i.e. not an investment property). the amount of mortgage must be under the FHA Mortgage Cap for the area in which the home is located. In Washington DC and the surrounding Maryland and Virginia areas, the cap for a single-family home mortgage in 2020 is $765,000. The loan must be issued by an FHA approved lender, and it can be for up to 110% of the appraised value that the home will have upon completion of the project. The homeowner must have a credit score of 500 (and in some cases 580) and put down at least 3.5%. Finally, for a full Section 203(k) loan, the minimum amount of the remodel is $5,000.
What can be done with a Section 203(k) loan?
A wide variety of remodeling projects are appropriate for a Section 203(k) loan. The project needs to be code compliant and meet certain structural and energy efficient standards. According to HUD, projects can include:
- structural alterations and reconstruction
- modernization and improvements to the home’s function
- elimination of health and safety hazards
- changes that improve appearance and eliminate obsolescence
- reconditioning or replacing plumbing; installing a well and/or septic system
- adding or replacing roofing, gutters, and downspouts
- adding or replacing floors and/or floor treatments
- major landscape work and site improvements
- enhancing accessibility for a disabled person
- making energy conservation improvements
Working With the Right Contactor
Unlike ordinary remodeling jobs, it is highly recommended that you work with a contractor familiar with the Section 203(k) process. The contractor must be able to comply with the rules and complete paperwork to report on progress and other requirements of the loan. They must also be able to perform the work without a down payment since they will only receive funds from the escrow account as work has been completed. Needless to say, a licensed and insured contractor is required by the rules.
A Section 203(k) loan is an excellent option for financing a loan remodel. For a smaller project, a Section 203(k) Streamline is available for work capped at $35,000, and it involves less paperwork and may not require a HUD Consultant. If a Section 203(k) isn’t right for you, Fannie Mae and other financing options are possible.
GoPro Construction has years of experience with the process and paperwork involved in a Section 203(k) project. We know how to work with Hud Consultants and homeowners to achieve an attractive, compliant remodel that can transform your home. Contact us today to learn more about how we can help with a Section 203(k) remodeling project.