The specification of repairs (SOR) is the first step in the process of determining if the existing dwelling you want to purchase actually qualifies for a FHA 203K loan.
A FHA 203K loan is a government loan that is administered by the FHA (Federal Housing Administration). This program has been in existence for a number of years. It lost popularity in the mid-1990s but started gaining in popularity again in the mid-200s. The intent of this program is to encourage potential home buyers to purchase existing dwelling that may be in need of renovation and/or repairs by providing them a loan. The FHA 203K is a loan program that bundles the home loan along with a home improvement loan which makes it ideal for individuals looking to purchasing an existing dwelling for their primary residence that is need of renovation or repair.
Those individuals looking to purchase an existing dwelling but do not want to take on the responsibility of purchasing a dwelling that is need of renovation and repair because they would need to apply, be approved, and make payments for both a home loan and a home improvement loan really benefit from a FHA 203K loan.
There are two types of FHA 203K loans – a regular 203K loan and a streamline 203K loan. There is a specific list of renovations, repairs, and purchases that pertain to each type of loan. Basically the regular loan is for repairs that are required to the structure of the dwelling, the cost of repairs and/or renovations is quite expensive, the timeline for making these repairs is longer than a period of 6 months, the dwelling cannot be inhabited while the repairs and/or renovations are being made, etc. The streamline is for less extensive renovations and does not require the expertise of an architect or engineer. The minimum amount of a 203K loan is $5,000. The maximum amount of a regular 203K loan is 110 percent of the dwelling after renovation. The maximum amount of streamline 203K loan is $35,000. Of the 2 types of loans, the streamline 203K is the most commonly requested and approved.
With a 203K loan both the individual(s) looking to make the purchase of an existing dwelling and the existing dwelling itself must meet specific qualifications. The potential buyer(s) must make this dwelling their primary residence. This is not a loan program for “flippers”. Only 1 to 4 unit buildings qualify for this type of loan. Condos and townhouses qualify only for a 203k loan if the repair and renovation work is required inside.
In order for an existing dwelling to qualify for either a regular or a streamline loan, it requires a contractor or independent consultant to look over the property and complete a specification of repairs. The repair specification is a write-up (i.e., report) of the work that needs to be done to repair or renovate the existing dwelling and a detailed estimate of the cost of the repairs or renovation - it is not a really considered a bid but rather an appraisal report that is given to an appraiser to help determine the current value and future value of the property if the repair and renovations are completed. The results of this write-up determines not only if the dwelling qualifies for a 203K loan but also whether it qualifies for a regular 203K loan or a streamline 203K loan. The specification of approval assists greatly in the process of coordinating what repairs and renovations need to be made to a dwelling with the potential buyer, the lender, and the contractor doing the actual work. Though the potential home buyer does not have to use a consultant or contractor in order to apply for a 203K loan; however, it does expedite the process.
There is an extensive list of items that can be financed with a 203K loan. Neither the regular or streamline 203K loan permits the financing of luxury items such the installation of a swimming pool, tennis court, etc. Everything from making a dwelling more energy efficient by installing new doors, windows, roof, floors, and HVAC to making repairs to a concrete driveway or a concrete sidewalk on the property qualifies for a 203K loan. If there is masonry work that needs repair then a concrete repair specification should be submitted listing what needs to be done in order and submitted along with the appraiser report.