Do you have a home that could use some serious updates? And maybe you don’t have the cash on hand to pay for these renovations out of pocket. If so, FHA 203k refinancing may be the solution you seek.
How does 203k refinancing work?
Even if the mortgage you currently have isn’t an FHA loan, you can still take advantage of refinancing that’s backed by the Federal Housing Administration. With an FHA 203k loan, you can borrow money to cover renovation costs and roll that sum into the monthly payments of your existing mortgage. A move may makes sense given today’s low interest rates. These 203k refinance loans often have low down payments (3.5% is the minimum) and low credit score requirements. Add in competitive interest rates compared to many other types of loans and you’ve got a great option to give your home a much-needed upgrade.
The Two Flavors of 203K Refinancing
There are two options with FHA 203k refinancing: Limited 203k loans and Standard 203k loans. Overall, they’re similar but do have key differences.
- A Limited 203k has no minimum dollar amount and is capped at $35,000, while a Standard loan has no upper limit, but a minimum loan amount of $5,000.
- Limited 203k loans are for smaller projects and can’t be used for major structural upgrades; Standard 203k loans are meant for major renovations.
- Limited loans have more flexibility in choosing contractors, while Standard 203k loans require licensed contractors.
- Projects under $15,000 don’t require inspections with Limited loans, while all work with Standard 203k refinancing, no matter the cost, requires inspections.
Home Improvements With FHA 203Ks
Cash-out isn’t the only option for home improvements; FHA 203K Rehabilitation Loans are designed specifically for this purpose, from upgrades, such as bathroom and kitchen makeovers, to significant reconstruction. And your initial mortgage doesn’t have to be an FHA Loan — anybody can do refinancing using an FHA 203K. There are two types of 203K refinancing: limited and standard.
- Limited 203K refinancing goes as high as $35,000. If projects come in under $15,000, inspections aren’t required. But you can’t do most major structural work with a Limited 203K. For those, you need a Standard 203K.
- Standard 203K refinancing starts with projects that cost $5,000 and is usually for big stuff like replacing plumbing systems or adding on extra rooms.
Are there any requirements that I should know about?
A few. The list of eligible home-improvement projects with 203k loans is long, ranging from plumbing, roofing, and flooring to landscaping, a host of energy-efficient improvements, and more. But luxury upgrades aren’t allowed. So no swimming pools, tennis courts, hot tubs, barbecue pits, and the like. While home offices are fine, you can’t use 203k loans to turn part of your home into a commercial business. 203k loans require FHA mortgage insurance. And there are closing costs with FHA 203k loans, which are about the same amount as one would pay with other refinancing methods.
Most Popular Home Improvements
So you know that your home could use some major upgrades. And have the means to pay for them with 203k refinancing. You’re probably considering big structural stuff such as roofs and plumbing and heating systems, which often top the upgrade lists of many homeowners. Where else might you want to put your refinancing dollars? Here are some top home improvement projects to consider:
- Windows. Replacing old windows with new energy-efficient ones makes financial sense; the U.S. Department of Energy estimates that windows often account for 25% to 30% of heat loss and gain in homes. Beyond upgrades, adding more windows is a popular trend, with homeowners installing skylights, floor-to-ceiling windows, and even replacing entire walls with glass.
- Home offices. Millions of office workers shifted to telecommuting with the onset of the coronavirus pandemic. And many will stay that way, making home offices more important than ever. From converting an existing space, such as a bedroom, to add-on construction, creating a dedicated at-home workspace is a practical idea.
- Flooring. Replacing old worn-out carpets with new ones is a popular home upgrade. And while carpeting remains a top choice for many, other flooring trends are on the rise. Today’s luxury vinyl isn’t like the flimsy stuff from the old days, with modern high-quality vinyl flooring that is nearly indistinguishable from wood, stone, and ceramic. And traditional wood flooring is always a great way to go.
- Disaster preparedness. As weather events related to climate change are increasingly bearing down on homeowners, fortifying homes against Mother Nature has become more common. These upgrades include flood-mitigation measures such as increased drainage and installing flood-proof windows and sea-wall barriers, as well as backup power systems, storm shutters, and more.
Using 203K Loans for Investing
While 203k rehabilitation loans are designed for primary residences, there are some ways they can be used for investment properties. One way is to refinance the mortgage on the home you live in, using the loan to make renovations on that residence. Then, one year after the loan closes, you may move out and rent the home to someone else. With some stipulations. The FHA requires that your move has to be for a legitimate reason, such as the need to relocate for a new job or the very real need for more space with a growing family. In essence, it’s possible if you planned to stay in the home for more than a year, but factors beyond your control changed that plan.
It’s also possible to use 203k loans for purchasing investment properties. Savvy investors may wish to use 203k loans to purchase fixer-uppers with the intention of flipping the properties for profits. However, that’s not feasible; 203k mortgages, whether they are for purchases or for upgrades on existing properties, are restricted for use with primary residences — the borrower must reside at the property. But it is possible, and common, for the owner of a property to live there and utilize the rest of the property as an investment with rental units.
According to FHA rules, a borrower can purchase a multi-family building with two to four units, or a structure that they’ll convert into a similar multi-unit property, using a 203k. On the condition that the borrower lives in one of the units for at least 12 months. After that? Then the borrower is free to move out (again, conditionally) and rent the unit that they once lived in. It’s worth noting that one can’t accumulate investment properties this way, by merely living in each newly acquired multi-family building for a year and moving on. A few exceptions aside, FHA 203k loans are one-at-a-time deals.
