In short, an FHA 203K loan is a loan that’s given by the federal government to someone trying to purchase and repair a fixer upper–something that many lenders would find too risky.
These loans often also include a contingency reserve, which is usually 20 percent of the total amount to be used for unexpected expenses and personal rent while repairs are made. It’s perfect for someone who wants to purchase a fixer upper with certain repairs in mind, but who can’t qualify for a loan from a traditional lender to make the repairs happen.
What Homes Are Eligible?
Here are a few of the basic conditions you can use to determine if a 203K loan may be worth considering.
- Must be a home that’s built for one-to-four families.
- Must be a home that’s been completed for at least a year.
- A home that has been torn down is eligible as long as some of the foundation is still there.
- Many condos are not eligible unless they’re approved by the FHA (Federal Housing Administration).
- Must qualify as being under the FHA cost requirements, which means the home value can’t exceed a certain amount. This amount varies based on the location of the home.
- Loans are not limited to new purchases–they can also be used on repairing homes you already own.
Types Of 203K Loans
There are two main types of FHA 203k mortgage loans for people seeking to purchase a fixer upper. The first is your standard 203k, given to people making major structural repairs, such as replacing a roof or adding onto the house. This involves getting either the as-is value of the home plus estimated repair costs, or getting 110 percent of the estimated value of the property after the repairs have been made–whichever amount is less.
The second type of 203k loan is usually much smaller and easier to get, called a streamlined 203K loan. It’s typically used for more minor repairs and remodeling. With the streamlined FHA 203k loan, you will usually get the purchase price of the home plus up to $35,000. In both instances, you’ll probably need to have an appraisal done in order to determine how much money you can qualify for. With either type of 203k loan, you’ll also need to be ready to make a down payment of 3.5% of the loan upon obtaining it.
What Are The Benefits?
The most important benefit of a 203k loan is that it lets you buy a home that the typical lender might find too risky to invest in. There are few other options when you find yourself in this scenario, allowing the 203k loan to open you up to home buying opportunities that wouldn’t be possible otherwise.
Another thing that makes the 203k loan unique is the very low down payments. Paying only 3.5% upfront means buyers avoid financial strain while they’re dealing with the repairs, hopefully improving the lender’s chance of getting their money back. These loans make things convenient by putting both buying a home and getting the money for repairs into a single process. If nothing else, at least that means you’ll be spending less of your own time dealing with both processes individually.
One last underlying benefit of the 203k loan that often goes ignored is how much this program can do for a community. It encourages rebuilding, repair and regrowth in places where homes are often run-down and often lack much value. By improving a home in an area like this, it can raise the property value of everything around it, especially if there are multiple people doing the same thing.
Are There Downsides?
While a 203K loan might sound like the perfect solution for you, there are a few things you need to be aware of prior to seriously considering applying.
- You’ll have to pay mortgage insurance. As an FHA loan, 203k loans require that you pay mortgage insurance for at least 11 years, sometimes longer. That will show on your monthly payments…they’ll probably be a little higher than you thought they’d be.
- 203k loans take a long time to process. There’s a lot of paperwork involved, so there’s a good chance you’ll have no choice but to be patient.
- Be prepared for higher interest rates and extra annual fees. Due to the extra risk taken by the lender, you won’t be getting the best interest rate in town.
The Bottom Line
Obtaining a 203K loan can be an awesome thing to do if you’re looking to buy a fixer upper home. It puts money in your pocket in instances where most lenders would laugh you out of the room.
However, it should be noted that many professionals won’t recommend this for first-time buyers, so if you fall in that category, proceed with caution. Turning a fixer upper home into a viable living space can be a very difficult thing to do, especially if you don’t have any experience dealing with repairs.
Cautionary tales aside, next time you’re in the market to buy a home, knowing how to properly utilize an FHA 203k loan can open you up to an entirely new realm of housing opportunities to consider.
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