An excerpt from the latimes.com:
This is the Federal Housing Administration’s rehabilitation mortgage. It has been a hot ticket for investors who are picking up distressed properties because it allows them to roll both the price of the house and the cost to make it habitable or marketable into a single loan. And some foreclosures are in woefully bad shape.
But regular buyers also can use the 203(k), especially if they want to do some work before moving in. And more important, current owners can use it as a refinancing tool to incorporate the cost of their home improvements into a brand-new first mortgage.
You’ll have to search for a lender in your neck of the woods who is familiar with the product. But once you find one, you’ll discover that the guidelines are extremely liberal.
For example, there is no limit on how much you can spend on your improvements. As long as the total loan amount does not exceed the FHA maximum ($697,500 in SD), you are good to go.
As long as the “as improved” appraised value of your property — that is, the value of the house plus the value of the improvements — does not exceed the maximum loan amount, almost anything goes. Only luxury items are verboten, says Jim Ragan, who manages the 203(k) program for Bank of America Home Loans.
“You can’t build Bobby Flay’s outdoor kitchen or a swimming pool,” Ragan says. “But other than that, practically anything else is permitted.”
Actually, the extent of the project can range from something relatively modest to a virtual reconstruction. The cost must exceed $5,000. But as long as the existing foundation remains in place, you can tear down the house and rebuild it if you so choose. Even such “soft” costs as inspection fees, architectural fees, closing costs and permits can be included.
The formula for how much you can borrow is fairly straightforward. The maximum loan amount (subject to the aforementioned ceilings) is 97.75% of the improved value of the property. If the appraiser says your project will add $125,000 in value to your $300,000 home, then you can borrow $415,438.
Better yet, there is no requirement for a reappraisal once the work is finished. Only a single up-front valuation is necessary.