Homes in need of structural repairs present problems for traditional financing. Structural deficiencies can pose health and safety hazards for occupants and affect a property's resale value. As such, lenders typically will not make a loan until a home is brought up to standard. In an effort to help rebuild communities and neighborhoods, the Federal Housing Administration (FHA) offers a program that covers the purchase or refinance of a home, plus the cost of structural repairs in a single loan.
The FHA insures loans made by approved mortgage lenders. It reimburses their losses in the event of borrower default, enabling lenders to help borrowers with moderate incomes, minimal down payments and credit challenges. As of 2013, the FHA requires a 3.5 percent down payment and finances up to 96.5 percent of a home's value. The 203(k) rehabilitation loan is the agency's main program for houses in need of repair.
Structural alterations include room additions, exterior grading and landscaping, or renovations that might prohibit you from occupying the residence, according to Rebuild USA. They also include finished attics, repair of termite damage and the treatment against termite infestation, according to the FHA. The FHA offers two types of 203(k) loans -- the streamline and the standard. The standard 203(k) is intended for more complicated projects that require engineering or architectural drawings and inspections.
Lenders must have prior approval to participate in the FHA's programs, including the the 203(k) loans. The Department of Housing and Urban Development (HUD) maintains a database of lending institutions, such as banks, mortgage companies, brokers and credit unions, that are qualified to take applications, underwrite, originate or service loans for the FHA. Not all FHA-approved lenders are versed in 203(k) loan origination, so HUD has designated certain lenders as qualified for this loan type. Its database lists those lenders that have issued the rehab loan within the past six months.
A standard 203(k) loan for structural repairs entails oversight throughout the construction process. It requires the hiring of a consultant and licensed contractors to perform the work. It also involves a draw escrow account, or trust, from which the lender draws funds to pay for completed work. The FHA allows a maximum of five draws for no more than a six-month construction period. The consultant must approve plans and inspect repairs before a draw is paid. This oversight ensures that the 203(k) money is used for the home repairs and that no luxury or unapproved items are paid for with funds from the program.
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