Loan Requirement's

Benefits of a 203K Refinance

There are many benefits of an FHA 203K Refinance. If the homeowner is looking to lower their monthly payments while also rolling in the costs of renovations to their FHA insured home, there are several options to have this done. If the credit of a homeowner improves and if there are additional funds, a refinance can lower the monthly mortgage payments directly by being offered a better interest rate. A lower interest rate is the easiest way to decrease monthly payments for a homeowner, however there are other options. Another option is for a homeowner to use either the equity of the home, or provide additional outside money as a cash-in down payment towards the home. Be aware that a homeowner can use the FHA 203K Refinance option if they did not use the FHA loan program for the original home loan. This means that if the homeowner decides to use the Conventional Loan program, they can then refinance the home through the FHA loan program, as long as it is their primary residence. This refinance option may or may not have out of pocket costs for the homeowner depending on the equity of the home. For the normal FHA refinance option, a new appraisal will be needed to detail the costs of the possible repairs.

Qualifications for Refinancing with a 203K Loan

In order to qualify for an FHA 203K Refinance, the refinanced property must be the borrower’s primary residence and it must also need renovations. What this means is the borrower cannot refinance a second or third home with the FHA 203K Refinance option. The FHA 203K Refinance options do not allow cash out options like the regular FHA Refinance program does. The FHA 203K Refinance Program requires that the borrower’s credit score is at least 580 and the maximum debt-to-income ratio is 50 percent. Fortunately, for the regular FHA Refinance option, a missed payment or two may be acceptable by the lender as long as the borrower provides a very detailed letter of explanation. This letter of explanation must include that the late payments were out of the borrower’s control and that late payments would not happen again. The FHA 203K Refinance Program is very similar to the actual FHA 203K process itself, making it possible to roll in the costs of specific renovations or repairs into the new loan.

The Process

The FHA 203K Refinance option is very similar to the FHA 203K Loan process. A borrower looking to apply for the regular FHA Refinance can expect the process for this loan to have a bit less information needed than it’s loan program counterpart. A borrower can also expect the process for this loan to have a lot of similarities to a Conventional Refinance option. Unlike USDA Refinances, the borrower can opt to perform a regular FHA 203K refinance on any primary residence, no matter what the original loan program was.

For the normal FHA 203K Refinance program, only the borrowers that will appear on the mortgage must submit asset and income documentation. Very similar to Conventional and USDA Refinance options, the underwriters use bank statements and pay stubs to verify the borrower’s assets and income. Any large deposits within 1 percent of the purchase price will need to be sourced with an accompanying letter of explanation, as this is required for anti-money laundering laws. This information is cross-referenced with a verification of employment that is filled out by the employer, most recent 2 years of W-2 forms or 1099 Forms and tax returns. All of these items will be needed by the underwriter to clear asset and income conditions.

For the FHA 203K Refinance option, credit, income and asset information is still needed for debt-to-income calculations still. Additionally, an itemization of all repairs and renovations, including costs must be sent up to the underwriter. 

An appraisal report is a report that will be needed for FHA 203K Refinance options. As a reminder, it is purchased by the borrower to show the value of a property. An appraisal report is important because it gives the underwriter a sense of value that may then be compared to the purchase price, as well as an idea of the overall condition of the home. If the home is appraised higher than the current remaining loan amount, this means that the home has gained equity. Keep in mind that an appraisal is not a home inspection. An appraisal report can cost anywhere between $300 and $600 dollars. An appraisal report for 203K will always have repairs that are needed. However, these repairs will be accepted by the underwriter only when a licensed contractor provides a cost estimation of all repairs being needed. This estimate will need to be attached to the appraisal report for underwriter review.

By refinancing your home loan, the finance charges you pay may be higher over the life of the loan.