Do you wish you had the money to make changes to your existing home? Maybe you wish you could have granite countertops, a new roof, or new flooring. Or maybe you are tired of the color of your home, either inside or out, but do not have the cash to get it painted by a professional or the time to do it yourself. You could get a home equity loan and make payments on a second mortgage, but the simple solution is the streamline 203K loan, otherwise known as the rehab loan. This great loan was once thought to be reserved for people purchasing a fixer upper home, but it can be used as a refinance too, making it very easy to make changes to your home.
The streamline 203K loan is reserved for cosmetic changes to a home that range from $5,000 to $35,000. These changes can include any of the following:
- Roofing (repair or new)
- Repairing or replacing HVAC, electric or plumbing
- Repairing or replacing flooring
- Changing the paint in the interior or exterior
- Adding new appliances
- Repairing or replacing exterior porches or patios
- Waterproofing the basement
- Replacement of doors and/or windows
- Accessibility improvements
- Removal of lead based paints
Any repairs done cannot be structural or add on to the home in any way. The repairs must also be completed in under 90 days and allow you to live in the home while the work is being completed.
If after discussing the changes you want to make with contractors and receiving bids from several of them, you realize that your costs will be above $35,000, you will need a standard 203K loan, which requires more work; the need for a loan consultant; and a bit more intricacy during the entire loan process. If you can squeeze the costs right at $35,000, however, you can breeze right through the streamlined process.
The Benefit of the Streamline 203K
Why would a borrower need the streamline 203K loan when they could simply take out a home equity loan and leave their first mortgage alone? This might seem to be easier, but in the end, it is the more costly option. Home equity loans often have much higher interest rates; fees for transactions; and are more difficult to qualify for with the lender because the lender has to take second lien position. The streamline 203K loan is an FHA backed loan, which means easier qualifications to obtain the loan; lower interest rates; and no fees for disbursements. In addition, you have the advantage of just one loan to pay rather than a 1st and 2nd loan, allowing you to get your first loan paid down faster.
The Difference Between a 203K and Home Equity Loan
There is one major difference between the streamline 203K loan and the home equity loan – the way the money is disbursed. In a home equity loan, you receive a credit card or checkbook that enables you to withdraw funds as you see fit. You are able to withdraw as much as your credit line is worth and can draw in any increment that you see fit. This means that you could pay for materials; make down payments for contractors; and pay for completed work on your own whenever you need to make a payment. The streamline 203K, on the other hand, works on draws that are controlled by the lender. The money that is set aside for the work to be done on your home is put into an escrow account. This money is then disbursed as it is agreed upon at the closing with the disbursement agreement. Before anything is signed, it is important to ensure that your contractors are on board with the disbursement schedule to ensure that your work is completed in a timely manner and that the contractors are paid. The streamline 203K typically disburses in 2 separate draws as the work is done in less than 3 months.
A Simple Process
The process of working with contractors and your lender for the streamline 203K is very simple. You will need the work that will be completed written out in detail, including line item costs of each repair/change that is agreed upon with the contractor. Aside from that, you will just need to make sure that the contractor is able to accept the draw periods set forth by the lender. As long as the appraisal for the home comes back high enough to cover the first mortgage, and the costs for the changes in the home, the loan will go through (assuming you qualify for it with your credit score, debt ratio, and employment). As long as the loan amount is no more than 110% of the future appraised value, you will be eligible for the streamlined 203K.
This process is different than the process for a home equity loan – there is no one to approve the work or to care about the future appraised value of your home. You pay the price, however, with the higher and most likely, variable rates that could change from month to month, giving you a bit of uncertainty when it comes to creating a monthly budget.
If you have a credit score of at least 580, do not have any late payments in the last year, have an average debt-to-income ratio, and have a stable income, you will likely be a good candidate. The streamline 203K has the same qualification guidelines as a standard FHA loan, making it easy for “riskier” borrowers to get into a loan that will allow them to fix up their home, add value to it, and enjoy their home for many years to come.