RANCH REMODEL

When we started looking for a home, I researched all the financing options out there. Given our circumstances, and being forced to move faster than planned, we knew FHA was the best option for us. It allowed us to put as little as 3.5% down so we would have room to update the house and purchase necessities like a washer and dryer. With the house having many years of neglect and a family of smokers, we needed to have plenty left over to renovate everything, and I mean everything.

As we began to focus on this home with our agent, he brought up the idea of using the 203(k) to help with some of the repairs that were needed. The water heater was over 17 years old and the HVAC was terribly underpowered for the house. As anyone that has ever purchased a house will tell you, the A/C or hot water heater are always one of the first major repairs that have to be done. So, we looked into the 203(k) and what it offered.

In layman’s terms, the 203(k) is the same type of mortgage as the standard FHA 203(b) loan. The only difference in the 203(k) is the addition of repairs or renovations to the final purchase price of the home. For example, we came to an agreement with the seller to purchase the house for $140,000. We knew that the HVAC and hot water heater needed to be replaced soon, so we decided to get a quote for the purchase of a new HVAC, hot water heater, and some other minor repairs to the home (code requirements, electrical work, etc.). The quote we received was for approximately $12,500, a lot to fork out right after putting money down on the house. But, with the 203(k), the $12,500 was added to the purchase price to equal $152,500. We still pay one monthly payment on the full $152,500 figure and the repairs/renovations are taken care of.

The process worked for us like this:

We did the back and forth negotiations and settled on the purchase price. We then went into our option period, 7 days by our choosing. During that time, we got our home inspection done, our foundation inspection done, and had a licensed HVAC/plumbing contractor come out and quote the replacement of the HVAC, hot water tank, and the other miscellaneous repairs. After the option period was over and we decided to move forward on the house, an FHA appraiser came out and did his thing. He looked at the house and the comparables in the neighborhood to come up with the appraised value. Then, he factored in the quote for the renovations to make sure the house would appraise for at least our final mortgage value of $152,500. As long as the house can hold its value after the renovations, the loan goes through. After the renovations have been done, the appraiser must come back out to the house and make sure the contractor did everything as quoted.

Here’s what we had done:

- New 14 SEER Rheem HVAC unit and 5-ton compressor
- Larger 4-inch thick air filter unit
- UV Air Cleaner
- New digital programmable thermostat
- New ductwork in den (upgrade from one small vent to 2 larger ones)
- New ductwork ran to upstairs addition (was not included in older system)
- New 40-gallon hot water tank
- Hot water circulator for lower floor bathrooms
- Drain pan and leak detector with shutoff valve
- Grounding of electrical outlets in 2 bathrooms and kitchen
- New outlet in master bathroom
- All GFCI outlets in bathrooms and kitchen
- Repair of broken sprinkler pipe

There are also a few requirements for the 203(k) to consider, but they’re fairly simple:

- Repairs must be done by a professional, you cannot do them yourself
- The same professional that provides the quote must do the project
- All projects must be done within 90 days of closing

The 203(k) is a great option for those looking to renovate an outdated home. While not for everyone, it can make or break the sale of a home that has issues. Because of it, we now have a great HVAC system and a hot water tank that should last at least 10 years. Without it, we probably wouldn’t have bought this home given all it’s problems. Now, I can say it was the best choice we could have made in our situation.

Note: I am not a financial professional, but I do my homework and try my best to give accurate info. With that said, make sure you work with a good mortgage consultant or realtor that is experienced with real estate financing.