Interested in a Fixer-Upper? What Every Buyer Should Know About the FHA 203k Home Loan
Purchasing a fixer-upper can be an excellent strategy for today's home buyer. Not only will making the decision to consider these homes expand the currently tight supply of available listings, it can also help families purchase homes that are much larger than they might otherwise be able to afford. Many buyers, however, avoid these fixer-upper or distressed homes because of concerns about the cost of repairing or renovating them, along with the cost of the actual purchase. If you plan to purchase a home soon and would like the option of considering a fixer-upper, the following FHA 203k home loan guide may be just what you need.
Key Points of the FHA 203k Home Loan
Like its more familiar cousin, the FHA home loan, the FHA 203k home loan is administered by the Federal Housing Administration (FHA) and made available to buyers through approved banks and mortgage lenders. There is, however, one key difference.
Traditional FHA home loans require the property to meet safety and condition guidelines in order to qualify for the loan. In contrast, the FHA 203k home loan offers buyers the opportunity to purchase and close on a home that does not currently meet these standards and will need to be renovated in order to do so. This is done by financing both the purchase price and the costs of all repairs and renovations in one mortgage. This means that the buyer does not have to use a cumbersome, higher interest construction loan and then worry about converting to a regular mortgage later after the work is complete.
Because these loans were designed to help more people become homeowners, the down payment requirement can be as low as three percent of the total loan amount.
FHA 203k Home Loans Require Careful Planning
In addition to having the same three percent down payment requirement as standard FHA loans, the FHA 203k home loan is also insured by the Department of Housing and Urban Development (HUD). It requires that buyers meet similar lending requirements, such as debt-to-income rations, minimum credit scores, and income verification.
Borrowers who are using the FHA 203k home loan to purchase a fixer-upper house are required to work with approved contractors, FHA inspectors, and appraisers to determine what work must be done to the home to bring it up to minimum standards for the program and complete it. Just as in a traditional real estate transaction, the seller is paid for the home at the closing, but the mortgaging process can take longer than with a traditional mortgage. The amount in excess of the actual purchase price of the home is placed into an escrow account, which will be used to pay contractors as work is completed. Any money leftover in this account after the home is completed is applied to the borrower's principle amount. Careful planning and bidding of the work is crucial, as is the selection of contractors who will be able to work successfully within the confines a six month completion time frame.
Important Facts for Buyers to Know Before Applying
Before applying for an FHA 203k home loan, buyers should know the following facts about the program and how it can be utilized when buying a Calabasas home, including:
- The loan can only be applied for through an approved FHA lender
- The buyer must be an owner-occupant, not an investor
- The loan can be used to purchase single family homes, 2 to 4 unit multi-family homes, and condos, (varying loan limits can apply, depending on the area)
- The actual loan can be written for an amount up to 110 percent of the homes estimated appraised value once completed
- The FHA will require the completed home to meet certain safety and health guidelines which will be verified through the appraisal and inspection process
- The loan can include housing costs for the borrower while the work is ongoing, as long as the actual mortgage amount does not exceed 110 percent of the estimated completed value of the home
- All work on the home must be completed by approved contractors and no DIY repairs or renovations are allowed
- The processing time for an FHA 203k home loan can be lengthy, due to the need for all documentation, including contractor bids to be approved by both the local lender and the FHA
- An FHA 203k streamlined loan is available for the purchase of homes that require less extensive renovations and may be able to process much more quickly than the regular 203k loan
To learn more about the FHA 203k home loan and how it can expand home buying opportunities, prospective borrowers should consult with a local FHA-approved lending source, or speak with their real estate professional.