Thursday, July 23, 2015

Reconstruction Home Loans are Real! Here's What You Need to Know!

Home loans for new residential construction are one of the most commonly available loan products available today. Obviously, there are standard home loans as well, but what about reconstruction home loans? With today’s housing market being what it is, consumers who purchase a home in need of a little TLC certainly can’t be expected to shoulder renovation costs that make a home habitable, can they? As it happens, there’s a special loan program that helps new home owners cover the costs, its an FHA loan program, and it really isn’t as odd these days as you might think!

The FHA coins this type of loan a section 203(k) loan. Put simply, it allows home buyers to fold the cost of renovations to a property into the purchase mortgage, eliminating the need of buyers to take out a second mortgage to cover repairs and renovations. 

These types of loans have increased in popularity in the last ten years, as homeowners who couldn’t afford to make mortgage payments were forced to abandon properties, sometimes leaving them uninhabited for years at a stretch. This can result in damage to plumbing, loss of electrical fixtures and wiring to vandals and thieves, and significant levels of water damage. More and more, buyers are picking up these distressed properties for much less than their original purchase price, and are having to spend tens of thousands of dollars bringing them back up to code.

There are two types of reconstruction home loans available through the FHA today. The first is called a “Streamline 203(k)” and is limited to repairs and improvements which total less than $35,000. This should be more than sufficient to replace electrical, repair plumbing, and put a new roof on many homes today, but if you require a loan with a bit more heft, there’s one available for renovations in excess of $35,000.

Limits on these loans are pretty straightforward: Taking out a loan for $400,000 on a home that will only be worth $150,000 when it’s renovated isn’t going to happen. On the other hand, $440,000 on a loan for a home that, when finished, will appraise for $400,000 fits the terms laid out by the FHA. 

There are also time limitations in addition to limits on who can take out these loans. For instance, investors cannot take out this type of loan. It has to be used on a principle residence. The time restrictions are that work must be begun within 30 days of the closing, and must be completed within six months. Check with your loan officer for other limitations and to address any further concerns you might have beyond what can be covered in this overview.

A reconstruction loan is a great way to rehabilitate the home of your dreams without going broke in the process. It opens up a world of possibilities for homeowners in making their new home exactly the home they want, and can help shore up the housing market by bringing badly neglected homes up to code and livable again!


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