Colorado Green Real Estate

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.

Previous Post: How to Use a FHA Loan to Purchase a Green Renovated Home Part I of II

Using the FHA 203k Renovation Loan to Purchase a Home and Make Green Improvements

I recently attended a workshop sponsored by Academy Mortgage about Federal Housing Administration (FHA) 203k Renovation Loans. The workshop opened my eyes to a number of possibilities that could greatly benefit home buyers. In this two part blog post, I’ll share with you a few of the key take-away points I learned about. Part one describes the 203k loan and the type of renovations allowed. Part two will describe the two different 203k loans, how they work and the added benefits of using a 203k loan to make green renovation improvements.

What is a FHA 203k Renovation Loan?

The FHA 203k is a loan available through the FHA mortgage insurance program that enables home buyers to purchase or refinance their home with a single loan that includes renovation and repair costs. This is a huge benefit to home buyers because the end result is most often a much nicer home they could purchase otherwise. The added benefit is the home is renovated to their specification which gives it a newer and much more personal feel. FHA 203k renovation loans may also be used with the purchase of HUD homes. For home buyers seeking a healthier, more comfortable and cost-effective home the 203k is an excellent way to renovate their home to include green features and benefits.

Of course, there are guidelines to follow and the process must be adhered to for maximum benefit. Home buyers must be able to envision the changes and willing to endure the time needed to complete the repairs. Patience and attention to detail are key ingredients to the whole process. But the time and effort required can be well worthwhile.

In today’s real estate market, if a home buyer is willing to be patient and follow the guidelines, they can purchase a home that needs repair, sometimes at a bargain price, and fix it up to create equity in the property almost immediately. This can be especially benefickal for first time home buyers. Academy Mortgage and Universal Lending are two well known national lenders with extensive experience in processing FHA 203k Renovation Loans.

What type of renovations is allowed?

Renovations may include small or big jobs including full remodels. Condos, town homes, manufactured housing, single family and most owner occupied 1-4 family mixed use properties. Almost any kind of renovation or repair can be financed including structural improvements, changes or additions. A partial list of allowed renovations includes:

• Kitchen and bath remodels
• New siding or roof
• Painting, landscaping
• Eliminate health or safety hazards such as lead based paint or mold abatement
• Add a garage, sun room, deck or finish out a basement
  
• Energy efficient improvements including insulation, furnace, windows, etc.

In part two, I'll review the process invloved and the added benefits of using a 203k loan to make energy efficiency and other green improvements.

John Thomas MEEE, MBA

Previous Post: Making American Homes More Energy Efficient