Wednesday, April 15, 2009

What is an FHA 203k loan?

So now you know about the house and about LEED for Homes. How are we paying for it all?

The answer is through an FHA-insured 203k purchase-rehab loan. I won't go into all the specifics of the loan here. But essentially, it's designed to help people buy and renovate houses that they plan to live in. It's not designed for investors. The advantage is that rather than getting one loan for the purchase and another for the renovation, you roll all the costs into one loan. And you pay a small down payment -- currently 3.5% of the acquisition price.

Without the 203k loan, we wouldn't be able to do this project. That's because typical renovation loans are made based on either the amount of equity (real money) you've paid toward your house, or on the value of the house compared with what you owe. In our case, we're paying a pittance for the house because, in its current condition, it's not worth much. So no loans available there. We're also paying a relatively tiny amount in down payment, so our equity is miniscule. So we strike out there too.

A 203k loan does require you to do more work up front than a typical purchase loan. For example, we have to get contractor estimates on all the work we want done before we close the loan. This has led to some late nights of planning, which I'll detail later! Also, you have to have an appraisal done on what your house will be worth post-renovation. This is to prevent you from spending more on renovations than the house will be ulimately be worth. There are other random bits of bureaucracy to navigate, but I'll talk more about those as they come up.

The 203k program seems like such a useful tool for implementing LEED for Homes renovations. More people should consider it!

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