Explained: FHA 203k Loan
Are you one of those people who have dreamed of buying a fixer-upper and renovating it to your exact specifications? Or have you found the perfect home but it needs a few upgrades before you can consider it yours? If any of these scenarios apply to you an FHA 203(k) loan could be the answer.
So, let’s take a look at how FHA 203(k) financing works and how to properly use it.
The FHA 203k loan is a government-backed mortgage that allows homebuyers to finance the purchase and renovation of a home with a single loan. Homebuyers can purchase a fixer-upper and use the FHA 203k loan to make repairs and renovations to turn the house into their dream home.
The fact that this loan allows the finance for both the purchase price of the home and the cost of repairs and renovations makes it easier for buyers to do both without the need to apply for a whole separate loan.
But what are some ins and outs of these loans you must be familiar with? In this article, besides that, we’ll also discuss who can qualify for them, what benefits they provide, and how to go about getting one.
An FHA 203k Loan: What Is It Exactly?
An FHA 203k loan is a type of mortgage loan that can be used to purchase and/or renovate a home. The loan is backed by the Federal Housing Administration, which makes it easier for borrowers to get a loan as the lenders have some sort of security.
The biggest benefit of an FHA 203k loan is that it acts as two separate loans and allows borrowers to finance both the purchase price of the home and the cost of renovations. This is a big help for borrowers who might not otherwise be able to afford both a down payment on a home and the costs of renovation.
Another benefit of an FHA 203k loan is that it can be used to finance energy-efficient improvements, which can help save money on utility bills over time.
To qualify for an FHA 203k loan, borrowers must have a credit score of 580 or higher. Those with credit scores between 500 and 579 may still qualify for the loan, but they will need to put down at least 10% as a down payment.
And the last thing to note here is that this loan applies only to individuals and families who intend on making the property their primary residence. This means that real estate investors do not qualify.
How Do FHA 203k Loans Operate?
FHA 203k renovation and mortgage loans operate by allowing a borrower to take out a single loan to cover all the costs of the house. The loan is issued with the understanding that the borrower will use the proceeds to buy a home and make improvements on that property.
The loan is structured as follows: the borrower makes a down payment of 3.5% of the total loan amount, which covers both the purchase price of the property and the cost of any renovations. The remaining 96.5% is then disbursed in two installments. First, an initial sum is given at closing to cover the purchase price and any renovation costs, and then a second installment is given after renovations have been completed and inspections have been conducted.
FHA 203k loans are an attractive option for borrowers because they offer low-interest rates and can help borrowers buy a house even if they do not have 20% to put as a down payment which is usually required for a more traditional mortgage.
Additionally, FHA 203k loans can be used to finance properties in need of significant repairs, which can make them a good option for first-time homebuyers or buyers looking for fixer-uppers.
FHA 203k Loan Types
There are two types of FHA 203k loans: the Standard 203k, and the Limited 203k.
Standard 203k
This is a mortgage loan that allows you to finance the purchase price of the home plus the costs of eligible repairs and improvements, all in one loan. The minimum amount that can be borrowed is $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area.
Some of the repairs that this FHA 203(k) loan covers include:
- plumbing,
- heat and air-conditioning systems,
- bathroom and kitchen remodeling,
- improvement of health and safety standards,
- landscape improvements,
- implementing access tools for disabled people,
- energy conservation systems.
Limited 203k
This one is a smaller-scale version of the Standard 203k and only allows for up to $35,000 worth of eligible repairs and improvements. This is intended for a home that does not require much work. And lastly, this option does not include structural work on the home, such as adding new rooms or landscaping, and the home must be habitable throughout the renovation period.
The Advantages and Disadvantages of an FHA 203k Loan
An FHA 203k loan is a mortgage product that many people see as a perfect solution for their housing problems. And it surely can be a great option if you’re looking to buy a fixer-upper because you can roll the cost of necessary repairs and improvements into your mortgage.
As we already mentioned, the biggest plus of an FHA 203k loan is that it allows you to finance both the purchase price of the home and the cost of necessary repairs and improvements all in one loan. This can save you a lot of money and hassle, as well as provide you with additional flexibility when it comes to financing your home purchase.
On the flip side, they are not that easy to qualify for. Because they are government-backed up and they are guaranteeing for you it is only logical to have stricter requirements to offset potential risks.
Advantages
- They offer low down payment options and flexible credit and income guidelines.
- They are also assumable, which means if you sell your home, the buyer can assume your FHA loan and continue making the same monthly payments.
- There is only one mortgage, one closing, and one payment that you will need to handle.
- You can claim a larger tax deduction (renovation and home purchase interest combined).
Disadvantages
- Stricter terms and conditions than other types of loans. For example, borrowers will be required to pay for private mortgage insurance.
- These loans are only available to certain types of properties, such as owner-occupied residences.
- You can’t do the work yourself and need to hire a professional.
- More paperwork is involved as compared to other loan options
Is it a Good Idea to Get an FHA 203k Loan?
If you’re thinking about purchasing a home but not totally satisfied with it, you may be wondering if it’s worth it to get an FHA 203k loan. As this is not an easy question to answer we will say that whether or not an FHA 203k loan is a good idea for you will depend on your individual circumstances. If you’re planning on making major repairs or renovations to the home, this could be a great option since you’ll only have to take out one loan.
However, keep in mind that there are some additional costs associated with this type of loan, such as appraisal fees and PMI. You’ll also need to make sure that you have the financial ability to complete the repairs and renovations within the allotted time frame.
While most repairs and upgrades do qualify, including rehabbing an existing swimming pool, anything considered extravagant or luxurious such as a tennis court, gazebo, or a building whole new swimming pool is not allowed.
So, in case you’re still considering an FHA 203k loan for your home purchase, be sure to speak with a lender to see if it’s right for you.
Conclusion
FHA 203(k) loans are an attractive option for those who want to purchase and upgrade a home at the same time. With these loans, you can roll the cost of renovations into your mortgage loan, get great rates, and have access to other benefits that traditional mortgages don’t offer.
However, it’s important to understand how FHA 203(k) loans work before applying so that you can be sure they’re right for your needs. Be sure to do some research and talk with a financial advisor or mortgage lender if you have questions about FHA 203(k) loans. And lastly, don’t overlook the fact that they are not that easy to qualify for so it may not be a smart move to spend so much time trying to fulfill certain requirements if you are unsure whether or not this is a perfect loan for you.
