Using the FHA 203k Renovation Loan to Purchase a Home and Make Green Improvements
This is Part II of a two part post about using the FHA 203k renovation loan to purchase a green renovated home. In Part One I described the FHA 203k Loan and summarized the type of renovations that are allowed. In this post I’ll describe the two different types of 203k loans and how they work. I’ll also review the benefits of using the FHA 203k Renovation Loan to purchase a home and make green renovation improvements.
How does it work?
The FHA 203k loan can save home buyers time and money by enabling them to purchace a home that needs repair, modernization or energy efficient improvements using a single loan for the purchase and the renovation. The 203k may also be used to refinance and renovate an existing home. The maximum loan limits are determined in the same way as an ordinary FHA loan (203b) and the same credit qualifications apply. There are two flavors of the 203k renovation loan—Streamlined 203k and Regular 203k.
Streamlined 203kRenovation Loan
As the name implies, the Streamlined 203k loan is designed for more rapid processing by eliminating much of the paperwork and simplifying the process to obtain the renovation funds compared to the more complicated Regular 203k. A Streamlined 203k loan is a part of the original loan balance, resulting in one loan and one mortgage payment. This loan is designed for simple repairs that can be easily estimated and completed. Here are some key points that characterize the Streamlined 203k Loan:
- Maximum renovation amount is $35,000, minimum is $5,000
- Loan may be up to 110% of after improved appraised value (includes purchase and renovation)
- Renovation funds dispersed in escrow 50% at closing and 50% on completion of the project
- Borrowers are not required to hire professional consultants, licensed engineers or architects
- Repairs may proceed from recommendations made by the appraiser or the home inspector
- Borrowers must occupy the property
- Work must commence within 30 days of closing and be completed within 6 months;
- Can be used to refinance an existing mortgage
- Structural renovations are not allowed with the Streamlined 203k Loan
Regular 203k Loan
The Regular 203k is a bit more complicated than the Streamlined 203k. A HUD consultant must be hired to oversee the process and perform inspections of bids and work completed. This loan allows for a complete remodel of the home provided professional licensed engineers and architects are used as needed and all required permits are obtained. Here are some of the key points that characterize the Regular 203k loan:
- There is no maximum renovation cost provided
- The loan is within the FHA limit for the county and;
- The loan is equal to or less than 110% of the after improved appraised value
- A HUD consultant must review and approve the renovations plans and bids prior to closing
- The HUD consultant must review work completed at each stage and approve up to 5 escrow disbursements. -Borrowers must occupy the property
- Work must commence within 30 days of closing and be completed within 6 months; -New additions, structural alterations and reconstruction are allowed
- Luxury items like swimming pool additions are not allowed.
Green Renovation with a FHA 203k Loan
The allowable energy efficient improvements are a huge plus allowing green renovations using 203k loans. Homebuyers can purchase a home and remodel it to include green features and benefits without the need to take out a secondary loan. For example, even though the existing furnace may work fine, a new high efficiency furnace may be purchased and installed with a 203k loan provided they can be shown to be cost-effective meaning the savings over the useful life of the energy improvements exceeds the costs of equipment purchase, installation and maintenance.
With this in mind, almost every home that is purchased with an FHA loan could be renovated to include green features and benefits. It’s important to recognize that a major renovation is not required to make significant energy efficient improvements in most homes. When it comes to energy efficiency there are lots of low hanging fruit including sealing the air envelope of the home, improving the insulation, sealing heating and cooling ducts and upgrading the HVAC, etc. Most homes can easily improve energy efficiency by 30-40% compared to existing performance without excessive costs.
The really great news is that in most cases the decrease in monthly energy expenses due to the improved energy efficiency of the home will more than off-set the incremental increase in mortgage due to the renovation loan. This is HUGE. Every FHA home buyer should understand the many options available to them to utilize a 203k loan to renovate their new home with green principles and products.
The benefits of improved energy efficiency and increased home value come with the bonus benefit of a healthier and more comfortable home renovated to suit the homebuyer needs. And all of this can be accomplished with a single purchase or refinance loan under the FHA 203k program.
Please feel free to contact me with any comments or questions. For information on how to locate and purchase a green home visit my website at E3GreenHOMES.com.