You’ve been eyeing that old Victorian on the corner, but it needs a lot of work. Or maybe you’re thinking of that house with the cute yard in the perfect location? You could almost see yourself living there, except for the shag carpet and outdated bathrooms…
Or perhaps you’re already a homeowner who is madly in love with their current home, and you would love it even more if it weren’t for the popcorn ceilings and crummy old kitchen cabinets.
Where there is the promise of a beautiful home beneath layers of old paint and dingy, old siding, there’s a loan product – the FHA 203(k) Streamline!
The 203(k) Streamline is designed for buyers and refinancers who would like to make renovations but don’t wish to blow all their savings in doing so. The 203(k) Streamline rolls the costs of home improvements and the purchase of your home into one loan and one closing.
More about the 203(k) Streamline
The Streamline 203(k) is designed for buyers who are purchasing a home that will require less significant renovations, or for refinance customers who are interested in renovating. For this product, buyers must intend to purchase a home that requires less than $35,000 in renovations and does not include structural work. This loan is designed for customers who want to do smaller renovations, such as remodeling a room or installing new flooring. It also offers a down payment as little as 3.5%. It does not require a specialist and the terms are the same as the fixed conventional, 15, 20, or 30 years.
How Financing Works
For a 203(k) Streamline loan, you will need a 3.5% down payment based on the price of the home with the cost of repairs included. For illustrative purpose, here’s an example of what this might look like – but beware: it contains math!
Purchase Price + Repair Costs x 3.5% = Down Payment
($125,000 + $25,000) x 3.5% = $5,250
Financing for your loan may include up to 96.5 percent of the home’s price, plus repairs and rehabilitation, up to 110 percent of the appraisal’s “as completed” value.
A 203(k) Streamline requires reserve funds of 10 to 20 percent of rehabilitation and repair costs be set aside for contingencies. This amount of money is meant to help you address potential issues that might pop-up during renovations (as they sometimes to do when you renovate a home).
There are some eligibility requirements that must be met before settling on a property.
Only owner-occupied properties are allowed when using the 203(k) loan. Homes that are considered “incomplete” by their builder are not eligible for purchase. And no matter how nifty you are with a tool belt, as the borrower, you cannot personally do the repairs yourself.
Some upgrades are considered “eligible” work items in a 203(k) Streamline.
Here are some 203(k) Streamline Do’s:
- Minor remodeling which does not involve structural repairs
- Painting, both exterior and interior
- Repair or replacement of existing flooring
- Repair or replacement of roofs, gutters and downspouts
- Repair or replacement or upgrade of existing HVAC, plumbing, and/or electrical systems
- Weatherization, including storm windows and doors, insulations, weather stripping, etc.
- Improvements for accessibility for persons with disabilities
- Lead-based paint stabilization or abatement
- Repair or replacement or addition of decks, patios, porches
- Basement finishing and remodeling, which does not include structural repairs, and/or basement waterproofing
- Window and door replacement
- Exterior wall re-siding
- Septic system and/or well repair or replacement
Likewise, there are repairs that are ineligible work items in a 203(k) streamline.
Here are some 203(k) Streamline don’ts:
- Changes to the structure, such as relocating a load-bearing wall
- New construction, such as the addition of a room or bathroom
- Repairs to structural damage
- Landscaping or site improvements, such as a fence or pool
- Any repair or improvement requiring more than 6 months to complete or more than 2 payments per specialized contractor
Just as you work to prioritize your “must-have” home features list, you should also prioritize your renovations and upgrade lists.
The process of a 203(k) Streamline loan varies from a conventional or FHA loan product in several ways, as well as the team of people around you working to make your dream home a reality! If a regular home loan is a sprint, then the 203(k) might best be equated to an endurance run! Not a runner? Don’t be discouraged. While the process is a bit longer, when you go 203(k) Streamline, you have the ability to buy a home that you then get to customize to your liking! How cool is that?
Find Your Home, Your Realtor, and Your Contractor
If you’re considering a 203(k), you’ve probably already found a home you want and have some idea that it needs repair. Connect with your choice of realtor and contractor, and team up to determine the cost of repairs and renovations, as well as what you would like to offer for the house.
As stated previously, no matter how handy you are with home repairs, you must use a contractor to complete the repairs to your home. It’s completely up to you as the borrower to acquire bids from contractors and choose who will do the upgrades to your home. This is a great feature of the 203(k) as you have total reign over who will do your renovations!
Before your contractor can be approved by your lender, they must provide the following items:
- A Detailed Contractor bid
- Copy of Contractor’s License
- Copy of Contractor’s Liability Insurance
- Copy of Contractor’s Business Card
- Completed Contractor Profile Report (provided to you by SMC)
- Completed IRS form W-9 from Contractor
- Homeowner Contractor Agreement (provided to you by SMC), signed by both Homeowner and Contractor
- Completed Rehabilitation Loan Permit Certification
In addition to meeting these basic documentation requirements, consider taking the time to carefully select your contractor(s) and/or subcontractor(s) is crucial to the success of your project. Not only do you want to make sure the team you hire to do the work are licensed and insured, but you also need to take the time to interview them, call up references, and do your homework. Strongly consider what it will be like to work with this person, how well you communicate with them.
Once you’ve determined which contractor or contractors/sub-contractors you want to use, ask them for a detailed estimate on the work your future home will need, and provide this to your SMC mortgage banker.
A tip, if this is your first 203(k): having your home in mind, bids in hand, and a decision on your choice of contractor when you go to talk to your SMC mortgage banker will help you find out if you prequalify much faster!
As mentioned previously, your mortgage banker will need your detailed contract bid to prequalify you for the loan amount, which would consist of not just the purchase price of the house, but also the cost of renovations.
Once you have your bids, have determined your contractor and have acquired your contractor’s documentation (including the detailed bid) you’ll be asked to provide other documentation your SMC Mortgage Banker. Among these documents are your contact and personal information, co-applicant information (if someone is applying with you), financial information (your income and assets), and declarations (judgements, previous foreclosures, etc). Using this information and your credit score, SMC can determine whether or not you prequalify for a 203(k) loan. This part of the process is no different than any other type of home loan process.
There is an appraisal and a final inspection in a 203(k) Streamline. The first appraisal is ordered by your SMC mortgage banker. The appraiser will assign value to the home “subject to” the proposed renovations, repairs, and upgrades you wish to make.
After the renovations are complete, the same appraiser will return for a final inspection of the property to ensure the “subject to” work has been completed.
Processing & Underwriting
The main duty of a processor is to organize and validate your loan documents to ensure they meet the lender’s standards, and that no additional documents are required for the underwriting process.
The length of this step varies widely and is contingent upon your situation. Because there are situations that cause complication in the documentation phases of loan processing, you should be prepared to provide additional documentation.
It is important to be prompt in supplying additional documentation, as this will often determine the amount of time this process will take!
After your documents are processed, the underwriter will take an in-depth look at the documents to assess your qualifications. They will look at your employment record, your sources of income and your assets and analyze your detailed credit report.
This is the final documentation phase, so your mortgage banker may ask you to provide additional documents. Like processing, the timeliness of this phase is largely dependent on your response to your mortgage banker’s documentation requests.
Insuring Your Investment
You cannot complete your mortgage process without first purchasing homeowner’s insurance. Insurance is important for two reasons: it protects your new investment, and it is required by your mortgage banker.
Stockton Mortgage can provide you with the contact information for local insurance companies if you are having trouble selecting one. Keep in mind that if you are purchasing a home in a flood zone, you must purchase flood insurance as well. Stockton Mortgage will obtain a flood determination, which will inform you if your home is in a flood zone.
Three days before your official closing, you’ll receive a Closing Disclosure that will detail your final closing costs – so there should be no surprises when you make it to the closing table.
Closing & Final Inspection
In a basic 203(k)closing, the attendees will be you and your mortgage banker, the seller, your real estate agent, and the closing agent, unless you’re refinancing.
At your closing:
- You will sign documents that make you the official owner of your new home
- You will sign your mortgage loan documents
- You will get information on how to make your mortgage payments
- Stockton Mortgage will pay the seller for you
- Funds for your renovations will go into escrow
- Material costs (up to 35 percent of each bid cost) will be disbursed to begin the renovation project
Once your contractor and/or subcontractors have completed the project, the final disbursement of payments will be made once the project, final inspection and title update are completed. Disbursement of funds could take a few weeks, pending the submission of request, processing, inspections and updates. If there is any money left-over after renovations are complete, those funds go toward the principal of your mortgage. (Sorry, but no spending sprees with the leftovers!)
Celebrate & Settle In
Now there’s nothing left to do but celebrate and settle into your new home! And also to give yourself a pat on the back because you paid a major role in orchestrating the making of your home truly your home.
Having now read this 203(k) guide, you’re an expert – right? To simplify the process, we’ve made a cheat sheet in the form of a workflow to help you know how exactly the process is to unfold!
- Obtains bids and required personal financial documentation.
- Submits contract bids, etc., and works with mortgage banker to get pre-qualified.
- Provides all information to appraiser.
- Processes, underwrites, funds and closes the loan.
- Completes renovations.
- Appraiser completes final inspection of home.
- Final payments are made to contractor(s) for labor, title updates, etc.