Declining U.S. home values have placed many homeowners in a tough spot. This loss of value has prevented some from selling and moving up to a new home, while others who would prefer to stay in their home have been putting off home improvements because of their inability to qualify for a home equity loan.
But if you're interested in renovating your kitchen, replacing an outdated furnace or ripping out your carpet to install hardwood flooring, refinancing into an FHA 203(k) mortgage could be your solution.
Refinancing and FHA 203(k) loans
The ability to wrap your repairs and renovations into a new home loan depends on your ability to handle the payments on a larger mortgage loan. For example, if you currently owe $150,000 on your mortgage and want to add $25,000 worth of repairs, your new loan amount will be $175,000. To qualify for the new mortgage loan, you'll need to have a debt-to-income ratio including the new mortgage payments of 41 to 45 percent, depending on the lender's guidelines. FHA loans typically require a credit score of 640 or higher.
A lender experienced with FHA 203(k) loans can help you through the process on an individual basis, but the starting point for you should be to decide what renovations you want to undertake and to identify a licensed, reputable contractor. A lender will tell you how they will handle the determination of your current home value, which could be based on an as-is appraisal or your current mortgage balance. An appraisal will also need to estimate the after-repair value of your home.
If you want to make repairs that cost less than $35,000, you can do a streamlined version of the FHA 203(k) loan that limits you to non-structural renovations. If you need to spend more than that or to make structural changes to your property, you'll need to do a traditional 203(k) loan with the assistance of a HUD consultant. Both types of loans are only available to owner-occupants and must be meet the FHA loan amount limit for your area.
You can contact your current mortgage lender to ask about an FHA 203(k) loan, but experts recommend that you work with a lender with experience with this type of loan. You'll want to compare mortgage quotes from a variety of lenders and interview them to find out about their experience with renovation loans.
With an FHA 203(k) loan, you can not only improve your home's value, but also add features that increase your enjoyment of it.