The FHA streamlined 203(k) loan is different from the standard FHA 203(k) loan for distressed homes in that it is designed for minor changes to your new home that will cost no more than $35,000 to complete. Major remodeling is out, but you can still carry out minor cosmetic alterations to your home using this loan. Do not confuse the FHA Streamlined 203(k) loan with the FHA Streamlined Refinance: they are different entities.
You can borrow between $5,000 and $35,000 dollars, which is added to the mortgage when you purchase the property. You are not permitted to make any structural alterations to the property since these are not classed by the FHA as being ‘minor’ alterations. So what can you use the loan for?
FHA Streamlined 203(k) Loan: Permitted Changes
You can use an FHA Streamlined 203(k) loan for a wide range of alterations and repairs to your new home. You can use it to replace old guttering and downspouts, Replace existing HVAC units, to repaint the entire property, to rewire or replumb the property, for new windows and doors, to waterproof the entire home, including the basement, to repair or replace a septic tank and improve accessibility. You can also have roof repairs carried out.
However, you cannot use the finance to install luxury items such as granite worktops, pools, hot tubs or Jacuzzis. You cannot carry out any structural repairs or structural additions such as new rooms – you can add porches, patios and decks, however.
All repairs and additions must comply with local building regulations, and any local authority zoning codes. They must also meet HUD’s minimum quality requirements.
Applying For the Streamlined 203(k) Loan
Once you have chosen the home you want to buy, make a list of the improvements or rehabilitation work you want to carry out. When you have the purchase contract written out, you must state that the purchase is contingent upon an FHA Streamlined 203(k) loan being approved. Fail to do that and you may be forced to purchase the property regardless.
You will then need a costing for the work from a recognized contractor who should give you a contracted cost for you to pass on to the lender. The contractor must be qualified to carry out all the work contracted. You can use a maximum of two different contractors.
When the appraisal is carried out, the total value of the house will be calculated as if the work had been carried out. You must make sure you are qualified to borrow the asking price of the property plus the cost of the work.
On approval of the loan and the work, the mortgage will be closed as normal for the combined cost – the price of the real estate plus the cost of the repairs. That cost cannot now be changed, and must be carried out for the stipulated price.
The sum approved for the work will be placed in an escrow account, together with an additional 10% – 20% contingency to be used only if needed and approved. The contractor can receive 50% at the start of the work and 50% on completion. The total spent is amortized into your mortgage, so need not be repaid separately.
That is fundamentally how the FHA Streamlined 203(k) loan operates. It is much simpler than a regular 203(k) and quicker to have approved.