The Basics of FHA 203k Loans

There are certain qualities we look for in a home: the neighborhood, the accessibility, the overall feel of the place, or maybe its potential. Sometimes, we find what we look for in a property that needs a little work — a bit of fixing here and there to make it more conducive for living.

And then we find ourselves wanting to buy a fixer-upper.

203k loan

FHA 203k loan: What is it?

Fixer-uppers can be a good idea. With a few minor upgrades, the home can be revived to its former glory, which consequently increases its market value. However, mortgage lenders are not very eager about shelling out money for a house that needs repairs. That’s where the FHA 203k loans come in.

The government insures FHA 203k loans. For this reason, home mortgage lenders consider a fixer-upper home they would have otherwise rejected. As long as the property meets certain livability standards, the 203k will provide the finances for both the purchase and necessary improvements. That’s basically two transactions in a single loan.

The FHA rehab home loan is not only for those who wish to acquire a fixer-upper, it’s also for families who aspire to refinance their current home and perform needed renovations.

FHA 203k Requirements

Since the FHA 203k loan is a sub-type of the FHA loan, it adheres to the same less stringent standards for qualification. The loan allows credit scores as low as 580, and only demands a 3.5% down payment, based on the purchase price plus the total cost of the project. A 43% debt-to-income ratio is also required. This means that 43% of the borrower’s gross earnings should be able to cover the mortgage payments and all other debts.

What repairs can be made?fha home renovation loan program

There are 2 types of the FHA rehab home loan, depending on the degree of work involved.

The 203k streamline covers relatively minor facelifts like bathroom and kitchen remodeling, change of flooring, painting jobs, appliance replacement, roof-work, and many more, as long as they do not alter the structure of the home.

The 203k standard, on the other hand, lets the borrower do any desired improvements and upgrades, except the addition of luxury amenities like tennis courts and swimming pools.

How to apply?

The process of applying for a 203k loan is almost similar to that of a regular FHA loan, but it would entail plenty of work after the loan is approved.

First, a decision should be made on which repairs are essential and what issues need to be addressed. Next is finding a licensed and insured contractor who would do the job and make accurate bids. The final bid is submitted by the lender to the appraiser, who determines the loan amount based on the future value of the property. When all the mandatory paper works are completed, the loan can be closed.

Is it for you?

If you are willing to rise up to the challenge, which includes the amount of paperwork that needs to be in compliance, the longer waiting time for loan approval, and the effort it takes to look for and negotiate with contractors, then the FHA rehab home loan might be for you. Who knows? That fixer-upper could be a diamond in the rough.


by nico2me