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Mortgage Refinance/Remodel-Renovate

Refinance FHA 203k

Mortgage Refinance to Renovate or Remodel

A Mortgage Refinance may be a viable alternative to purchasing a new home.  Currently there are some good loan products available to refinance and include costs of remodeling.   There are some advantages to a renovation over buying a new home, one of them being you can do the renovation to suit yourself.  FHA offers a FHA 203k loan that allows a person to refinance their home and include the costs of the renovation into one loan.  Most conventional loans will be a 2nd mortgage on the property in addition to the mortgage already owed.  As a borrower pays off their house on an existing mortgage they build equity.  The equity is what the seller would keep if they sell the property.  Building equity includes the portion of the mortgage paid and any appreciation of the property over time. A FHA 203k keeps mortgage as one, not only less confusing but normally less interest paid over time. The goal of course is to build up as much equity as possible. There are many good reasons the FHA 203k is the most popular Mortgage Refinance / New Mortgage available.

Factors to consider for a Mortgage Refinance/Remodel

There are factors to consider when determining whether to renovate or buy a different home.  Some of the same concerns will also be considered by the lender during the qualifying and mortgage application process.
  • What amount of money will you need to renovate or remodel?
  • Can the equity in your property fund the costs of the project?
  • After the renovation or remodel is complete what will be the value of the home?
  • What is the amount owed on your current mortgage?
  • What is the value of your home before the remodel or renovation?
  • When the renovation is complete will the location uphold the new value of the property?

According to some lenders if you owe most of your mortgage (specifically what is meant by most is not exact) you would probably be better off getting different types of financing other than conventional loan products, which leaves FHA.

FHA 203k Mortgage Refinance

A FHA 203k Mortgage refinance covers the purchase or refinancing  and rehabilitation of a home that is at least one year old.  A portion of the proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5000 but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either:

Whichever is less:

  1. The value of the property before rehabilitation plus the cost of rehabilitation.
  2. 110 percent of the appraised value of the property after rehabilitation.

FHA 203k loan Eligible Activities

The range of rehabilitation covered by a FHA 203k loan range from relatively minor (must exceed $5000) to major reconstruction is eligible.  However a home that has been demolished or will be razed as part of rehabilitation require the existing foundation system remains in place  A FHA 203k loan can also finance the rehabilitation property that also has non-residential uses, they can cover the conversion of a property to a one- to four- unit structure.  Some of the types of FHA 203k financing include:

  • structural alterations and reconstruction modernization and improvements to the home’s function
  • elimination of health an safety factors changes that improve appear and eliminate obsolescence
  • reconditioning or replacing plumbing, installing a well and/or septic system
  • adding or replacing floors and/or floor treatments
  • adding or replacing roofing, gutters, and downspouts
  • major landscape work and site improvements
  • enhancing accessibility for a disabled person
  • making energy conservation improvements.

If you still owe most of your mortgage, even if your home is worth more than you paid for it, you’re probably not going to want to tap into your home equity to help finance a new or second mortgage. If you’ve paid your mortgage down by a fair amount and your house appraises for a good value.  The goal of a remodel should also include increasing the value of the property. Should you use all  or most of the equity you have earned for the renovation costs and the value of the property  remains the same or slightly more  than it was prior to the renovation it seems you have spent money unnecessarily and will have to live it out and wait for appreciation over time.   I have seen people dump $10,000 into a bathroom and increased the value only $2500-$4,000.  When I lived in Arizona and Texas I witnessed people building $25000-$45000 pools to only increase the value of the property $5,000-$10,000. When remodeling a home the area must be considered, if homes in the immediate area are appraising for say 30% more than the house you living in, perhaps a nicely done renovation would be worth the dollars spent.

No-Cost Refinance Loan

There are some conventional loan products known as no cost refinance loan. A no cost refinance loan allows you to refinance your current mortgage at a better rate without having to pay fees to do so. In a nutshell it would be taking out a new loan at a small rate to pay off your old loan at the higher interest rate.  Some homeowners and lenders will use this route to cover the costs of repairs, the lender will add on the amount of the renovation to the value of the home so that the old loan is paid off they have a cushion to help pay for repairs and projects.  However, it has been my experience these loans come with a lot of fine print and the borrower will need a high FICO credit score to qualify.  I’ve found these conventional type loan products difficult to obtain and (my opinion) seems there is always something in the fine print.  To be fair all conventional conforming loans must follow Fannie Mae or Freddie Mac guidelines.  Since the meltdown of the mortgage industry in 2008 the industry has been through a renovation of its own and is highly regulated.   All of these regulations and guidelines are designed to protect the consumer not the lender.

I can be reached 7 days a week, holidays and weekends at the Larry Stepp Team at Gustan Cho Associates.  I look forward to offering information and assistance.


Larry Stepp     407-922-4755     LarryS.HomesNetwork@gmail.com

The information contained on HomesNetwork.org website is for informational purposes only and is not an advertisement for products offered by Loan Cabin or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates and do not reflect the policy of GCA, its officers, subsidiaries, parent, or affiliates.

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