In this blog, we will cover and discuss refinance after FHA 203k loan to lower rate mortgage. HUD, the parent of FHA, offers the FHA 203k loan programs which are acquisition and construction loans all in one closing and one loan. The greatest benefit of an FHA 203k loan is that, unlike other construction mortgage loans, the homebuyer only needs a 3.5% down payment of the after-improved value of the property. Most other construction loans require the property owner to purchase the property and will only lend 70% to 80% of the loan to value of the construction project.
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Case Scenario of Refinance After FHA 203k Loan
For example, here is a case scenario:
- if a home buyer were to purchase a $100,000 property
- needs a construction budget of another $100,000
- once the property is completely rehabbed it is valued at $200,000
- with an FHA 203k Loan, the home buyer will only need a 3.5% down payment of the $200,000 or $7,000 down payment
- FHA 203k Loans are great for homebuyers who want to purchase a fixer-upper or foreclosure in major need of rehab
How Does FHA 203k Loan Programs Work
The homeowner can gut rehab the home to his or her standards and choosing and in a sense is somewhat like a new construction home. FHA 203k Loans are becoming more and more popular. The whole process is streamlined where there is not a lot of red tape in getting an FHA 203k Loan approved, processed, underwritten, and funded.
Two Types of FHA 203k Renovation Loans
There are two types of FHA 203k Loan Programs:
- The FHA 203k Streamline Rehab Loan
- And the full standard FHA 203k Rehab Loan Program
Refinance FHA 203k Loan To Other Low Rate Mortgage Refinancing Options
Many borrowers can refinance after the FHA 203k loan to another mortgage loan program. FHA 203k loans are considered higher-risk loans so mortgage rates are higher than traditional FHA loans. Also, FHA 203k loans have an annual FHA mortgage insurance premium. Mortgage rates are higher than regular FHA and conventional loans, it is recommended that borrowers refinance after the FHA 203k loan after the completion of the project.
FHA 203k Streamline Rehab Loans
The FHA 203k Streamline Rehab Loans are limited to a maximum construction budget of $35,000. With an FHA 203k Streamline Rehab Loan, homeowners cannot do any structural changes to their existing homes. Homeowners cannot do any additions to their existing homes.
Type of Work Homeowners Can Do With FHA 203k Loans
Homeowners can do any type of home improvement such as the following:
- bathroom and kitchen remodeling
- basement remodeling
- attic remodeling
- new floors
- painting
- millwork
- appliances
- exterior such as new siding, new roof, new windows, new gutters/soffits/fascia
- other types of home improvements such as mold remediation, termite remediation, or others
FHA 203k streamline loans are a great mortgage loan program for buyers interested in buying a fixer-upper or foreclosure. Or buying a home that would not be able to be financed through traditional mortgage loan programs due to not being habitable.
Full Standard FHA 203k Loans
The second type of FHA loan is the full standard FHA 203k loan program. With a standard FHA 203k renovation loan, there is no construction budget. Homeowners can make structural changes as well as do room additions or add on to the existing property. Homeowners can do a complete gut rehab with the full standard FHA 203k loan program. Tear down and rebuild on the existing foundation are allowed. The full FHA 203k loan program is a great mortgage loan program for that creative home buyer who wants to purchase a fixer-upper or foreclosure and customize the home to his or her needs.
Qualifying For FHA 203k Loans
Mortgage lenders consider FHA 203k loans as riskier loans than traditional FHA loans. With higher risk comes higher mortgage rates. Mortgage rates on FHA 203k loans are higher than traditional FHA loans by at least 0.50% to 0.75%. Again, the lower borrower’s credit scores are, the higher the mortgage rates. For home buyers considering getting an FHA 203k loan, the best advice I can give is to contact us at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We can help you maximize your credit scores so you can get the lowest possible mortgage rates on an FHA 203k loan.
HUD Guidelines On FHA 203k Mortgages
Unlike most other lenders, Gustan Cho Associates does not have any overlays on FHA 203k renovation loans: The minimum credit score to qualify for an FHA 203k loan is 580. All other HUD guidelines apply with regard to the waiting period after bankruptcy and foreclosure and debt to income ratios. There is a minimum of a two-year waiting period after Chapter 7 bankruptcy discharge to qualify for an FHA 203k loan. There is a mandatory three-year waiting period after foreclosure, deed in lieu of foreclosure, and short sale.
HUD Debt to Income Ratio Guidelines on FHA Loans
The maximum debt to income ratio permitted for borrowers with credit scores of under 620 depends on the AUS findings. Debt to income ratio to get an approve/eligible per automated underwriting system findings approval is normally 46.9% front-end and 56.9% back-end. For borrowers with credit scores are at least 620 or higher, then the maximum debt to income ratio cap is 46.9% front-end and 56.9% back-end debt to income ratio. Unlike conventional loans, FHA loans have a maximum front-end debt to income ratio cap of no greater than 46.9% debt to income ratio front end for an AUS Approval. Borrowers can qualify for an FHA 203k Loan with unpaid collection accounts and charge offs.
HUD Guidelines on Charged-Offs and Medical Collections
Charge offs and medical collections are totally exempt and are not considered with us since we have no overlays. However, with non-medical collection accounts with a total aggregate unpaid balance of $2,000 or greater, 5% of the unpaid collection account balance will be used to calculate debt to income ratios. This holds true even though borrowers do not have to pay off the unpaid non-medical collection accounts. Borrowers with large unpaid collection account balances where the 5% will affect debt to income ratios, they can enter into a written payment agreement with the creditor and/or collection agency. That monthly payment agreement will be used in lieu of the 5% of the unpaid collection account balance to calculate debt to income ratios.
Refinance After FHA 203k Loan With FHA Streamline
Since FHA 203k loans have higher mortgage rates than traditional FHA loans, borrowers should consider refinancing their FHA 203k loan after the project has been completed to either a traditional FHA loan or another mortgage loan program. The loan originator can go over whether refinance after the FHA 203k loan would provide a net tangible benefit. Should analyze how much it will lower monthly payments as well as how much money homeowners would save.
The Fast-Track FHA Streamline Refinance
FHA Streamline is a great loan program offered by HUD. It enables a borrower with a current FHA loan to refinance their FHA loan with another new FHA loan at a lower rate with a fast-track mortgage process. No appraisal or income documents are required. Mortgage rates are based on borrowers’ credit scores. 203k loans have much higher mortgage rates than traditional FHA loans. After homeowners are done with their renovations, it is worth their while to see if an FHA Streamline is in order to save them money. Gustan Cho Associates are experts in FHA Streamline Refinances.
Start The Pre-Approval Process on FHA 203k Loans
Homebuyers of fixer-uppers looking for an FHA 203k Rehab mortgage lender with no overlays, contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week to answer any questions and issue a solid pre-approval letter.