Home improvements are necessary but can expensive. Fortunately, there is an alternative to finance it through the U.S. Department of Housing and Urban Development (HUD) for rehab repairs and maintenance. The 203k rehab loan is available as a second rehab mortgage to cover repairs and make the home nicer for the owner and the neighborhood. By working with the government the loan allows a particular set of advantages over traditional bank loans.
What is a Rehab Loan?
The FHA 203k rehab loan allows for repairs over $5,000 as a means of community improvement. It can cover structural or cosmetic improvements as needed. The concept is most banks won’t provide a conventional rehab loan for improvements without building equity in the home first, but the home needs rehab before attaining its true value. HUD steps in and recognizes the difficulty of rehab financing and taking a loan without equity in the house, and therefore provides the loan against the future value after repairs are finished.
HUD Loan Compared to Bank Rehab Loans
The obvious first reason for an FHA rehab loan is the fact it is government backed as a community resource rather than a bank loan designed to maximize profit for the lender. Although there is an amount of bureaucratic red tape to deal with to get the 203k loan, once obtained it is easier to manage while having the house rehabbed and built up to current codes and standards.
The bottom line behind home rehab loans is it’s in nobody’s best interest to have an unmaintained eyesore in the neighborhood. It drives down the value of other houses in the area and can draw undesirable types who may not meet the standards held by the other residents. The 203k loan allows people to keep the house maintained at a level that may not be affordable out of pocket but needs to be done to assure the quality of life for the family who lives there while keeping the neighborhood safe with a consistent appeal which holds the nearby homes’ investment values intact.
Similar to required maintenance is the idea of home upgrades to keep the home at the neighborhood standards of value and appearance. Upgrades might include an addition, a new façade, or turning the home into a multi-family dwelling. Each of these is a perfect application of the 203k loan. The purpose of the loan is to allow a homeowner to borrow against the house’s potential value rather than its current value, which can be a catch-22 when trying to improve a home without the required equity to make it hold the value it is capable of having.
If the Loan Isn’t Paid
Like any other rehab home loans, the 203k loan has to be paid back. It’s important to assure not to take on more of a burden than can be responsibly managed, just like how the original home mortgage was planned according to income and the new homeowner’s ability to make regular payments to accommodate their debt. The good news is that it’s for a good cause, the home is going to suit the needs of the family who lives there and be a welcome addition to the neighborhood after the upgrades are completed.
Rehab home loans are an important aspect of home ownership. A home that isn’t maintained loses the value of the investment, harms the surrounding community, and simply turns out to be a bad investment. HUD backed 203k home rehab mortgage loans can be a great way to renovate the home and solve the problems a home may inherently hold when repairs are needed. It simply makes good business sense to consider the options available when resources don’t allow a traditional mortgage refinance arrangement to handle necessary repairs, maintenance and upgrades.