What is a 203k loan? This is a question that too few people ask themselves before dumping themselves head over heels into a real estate negotiation. If you are looking for a convenient and subsidized loan that is backed by the good faith of the government, then the 203k loan may be the package for you. Here are some of the basics about the 203k so that you can make an informed decision about whether to use it or not.
Where Does the 203k Loan Come From?Â
The 203k loan comes from the Federal Housing Administration (FHA) as a program that is meant for people to move into houses that are not necessarily turnkey. It is meant to overcome the catch 22 of properties not being able to attract underwriting until they got repaired, but repairs not being able to conclude until the purchase of the property.
The 203k program does not come from the FHA directly. The FHA helps to lower the risk for private lenders to take on eligible borrowers. Private banks are still the entities that are giving money for the loans.
What Is the Purpose of the 203k Program?Â
As a renovation loan program, the 203k bundles together the funds to purchase and to renovate an eligible property. Insuring private lenders allows borrowers to occupy a home they may not have been able to afford otherwise. The government gains the benefit of a fully developed property that can be taxed. The bank gains a client that contributes interest payments on top of the loan payments.
Are There Different Versions of the 203k Program?
The standard 203k loan program is meant for real property that involves very serious changes in the infrastructure of the home. Under this program, a borrower might obtain the funds to add rooms to a house, landscape, and remove any obstacles that would make the house unlivable. The loan includes fees to hire a professional architect, engineer, and real estate consultant, and the services of these professionals are actually dictated as a requirement in the 203k standard.
There is also a streamlined 203k loan program that is meant for real property that does not require the extensive and immediate upgrades to be viable. As such, there is a renovation limit of $35,000 on the streamlined program. Architects, engineers, and consultants are purposefully left out of this version, and it is usually the less expensive of the two options.
How Do I Become Eligible for the 203k?
The 203k has the same requirements for eligibility as a standard FHA loan, including the requirements for a down payment, loan limitations, and qualifying credit. If you are unsure about the qualifications, you can ask a specialist, known as a REbuildUSA 203k Specialist within the 203k program. You will also be able to ask your preferred lender questions about qualifications.
The house itself must also be eligible for the program. Only single family homes and certain multi-unit buildings are allowed to be involved in the 203k. Condominiums are also eligible for the program if a borrower is trying to reduce the number of units in the building to less than four; however, only the interior can be improved under the loan program. Mixed use buildings are eligible under certain circumstances, but the only renovations that can be done with 203k funds are the residential upgrades.
How Is the 203k Eligible Home Appraised?
A home appraiser is given a list of the improvements to be made as well as their approximate costs. The appraisal that comes back will give the value of the home after these improvements are made. Banks may be willing to approve a loan for up to 110 percent of this appraised value.
Do I Have to Be a First Time Home Buyer or a Veteran to Use a 203k Program?
Many of the assumptions that surround FHA programs assume that a borrower has to be a military veteran or some other kind of government service person, but this simply is not true. A 203k loan can be used by owner occupants, eligible non-profit organizations, and even local governments. Even people who are looking to use real estate for business purposes may be eligible for the 203k program.
How Do I Get the Money for a 203k?
A lender will immediately distribute the funds to purchase the house at the closing table. The funds that are meant for renovation are held in an escrow account by the lender. The lender then pays out the funds in draws directly to the professional contractors under a standard 203k or to the borrower under a streamlined 203k.
Do not overlook the 203k if you are looking for a way to subsidize a home purchase. As one of the most effective programs for fixer uppers, the 203k may give you options that you did not even know that you have.
2 Point Highlight
The 203k has the same requirements for eligibility as a standard FHA loan, including the requirements for a down payment, loan limitations, and qualifying credit.
Many of the assumptions that surround FHA programs assume that a borrower has to be a military veteran or some other kind of government service person, but this simply is not true.
