Have you found a home that you love but it needs some upgrades and repairs? Whether you’re a first time home buyer or own multiple properties, the FHA 203K loan might be the perfect way to purchase a home that needs a little, or a lot, of love and repair.
What Is A FHA 203K Loan?
The FHA 203k loan helps the borrower open up one loan to pay for the purchase price of the home, plus the cost of repairs. Buyers end up with one fixed-rate FHA loan, and a home that’s in much better shape than when they found it. The 203k loan establishes an escrow account which holds the money so that the contractor can be paid ½ of the repair costs up front, and ½ when all of the work is complete. This ensures that the contract has enough money to start, but doesn’t bail on the project prior to completion. One advantage of 203k loans is that they are guaranteed by the FHA, which means lenders take less risk when offering this loan. As a result, it’s easier to get approved (especially with a lower interest rate).
Do I Qualify For A 203K Loan?
To qualify for a 203k loan, you’ll need to meet the same requirements as any other FHA loan:
- Your credit score must be at least 620 or 640, depending on the lender
- Your maximum debt-to-income ratio can only be 41% to 45%
- You need a down payment (or home equity if you are refinancing) of 3.5% or more
- The loan amount (including both the purchase and renovation costs) must be lower than the maximum loan limit for your area
- You must be an owner-occupant of the property you intend to renovate
203K Loan Options
While many of the features of an FHA 203k loan are similar to standard FHA loans, the renovation component makes these loans a little more complex and detailed for borrowers. There are two types of 203k loans: a full/standard option and a streamlined option. Which one is right for you depends on how much you intend to spend on your renovation and what you intend to do. Here’s what the differences are:
- Full/Standard 203K Loan: For bigger projects, you need a standard FHA 203k loan. For this loan, you must make at least $5,000 worth of renovations. You can do almost any home improvement project as long as it adds value to the property, such as building an addition, finishing a basement, and remodeling your bathrooms and your kitchen. However, even with the standard loan, some luxury items – such as a hot tub or a swimming pool – cannot be financed. In addition to the size of the renovation, the big difference with this loan option is that you are required to work with a HUD-approved consultant who inspects and evaluates your renovation. You can even finance as much as six months of mortgage loan payments into this 203k loan if you can’t live in your home during the renovation.
- Streamlined 203K Loan: The streamlined loan is limited to a maximum of $35,000 in repairs, regardless of the home value. There’s no minimum you need to spend, so if you’d just like to replace your carpet, you can wrap a few thousand dollars into your mortgage and avoid spending cash. Repairs must start within 30 days of your loan closing and be finished within six months. This loan product also limits the types of renovations you can make to non-structural, non-luxury items. In other words, you can’t add a second floor to your house or install a pool with a swim-up bar. You can use it, however, to upgrade to granite kitchen counters, replace your air conditioner, or put in new windows.
Obtaining an FHA 203k mortgage may seem complicated, but if your cash reserves are low or you don’t have a lot of home equity, it may be your best option. When chosing a lender you want to pick one with plenty of 203k experience so that you can avoid complications with the loan. We recommend using https://bondstreetmortgage.com for all of your mortgage needs. Bond Street has 10 years of experience and specialize in FHA 203K style loans. Make sure the contractor you choose also has 203k mortgage experience so they know what the FHA program may require in terms of inspections and receipts for proof the work has been done. With this program you can find yourself with the kitchen of your dreams and a monthly mortgage payment you can afford.