House is appraised more than it is selling for, can I get a 203K Rehab loan?

I am currently looking to buy a house that is listed at $140,000, but is appraised at $178,000. I would like to take out a slightly larger loan than the listed price in order to do some minor renovations (flooring, countertops, painting).

What would I need to get that? I know that a FHA 203K loan allows you to borrow more if you can prove that the improved value would be greater, but the value of the house is already greater.

I would be doing the work myself with the exception of the countertops.

2 Answers

The 203k Loan is not based on the listed price. It is based on the purchase price and the property's FHA AS-IS appraised value and its FHA improved appraised value. So, if the property's FHA AS-IS appraised value is $178k and the purchase is $140k, then you can get a 203k loan for $178k allowing for approximately $38k of improvements.

Most lenders do not allow borrowers to do the work themselves (called self-help), and even though HUD/FHA permits this, they strongly discourage lenders from allowing selp-help 203k's. Besides, on self-help 203k's, the cost of labor is still included with your 203k loan as a safety precaution. The amount of renovation money and cost estimate must be the same as if a contractor for hire is doing the work, just in case the borrower cannot complete the work according to HUD/FHA and lender guidelines. You must verify that your lender will allow self-help.

FHA 203k loans are based on after-improved value of the home. So you'll need an appraisal based on the value of the home once the work is completed.

Most lenders do not allow for DIY work - although there are a few exceptions. Read: DIY Procedures on FHA 203k LoansLink Text

So yes, it is possible to borrow the additional funds to have some remodeling done on this house. You'd do well to talk to a specific lender in your area who's a 203k expert about this particular house and the work you'd like to have done.

Best of luck!