What Is an FHA 203k Loan?
FHA 203k loans are available from the Federal Housing Administration, which is a government agency. The federal government created these loans to help lenders finance what they considered to be risky home mortgages. The risk for the lender is attributed to the condition of the property. Using the program in conjunction with work needing to be performed on the home after closing speciality is riskey to lender. Most people elect to do preferential repairs in this loan type. You also must include items to meet Minimal HUD property Standards.
FHA 203k loans are meant for damaged homes in need of rehabilitation or preferential updates and additions. This loan covers both the cost of the property and the cost of home repairs. The down payment is low (as little as 3.5%), and buyers benefit from more lenient eligibility requirements. If you are already a homeowner with a property that needs work, you can also refinance using these loans. Many repairs, including room additions, bathroom remodels, new roofing, floor coverings and air conditioning are covered by these types of loans.
Which Homes Qualify for FHA 203K Loans?
Basically, there are two types of FHA 203k loans: Standard ( Also call Consultant 203k) and Limited ( Formerly names the streamline 203k) .
Standard 203k loans address homes in need of structural renovations. Limited 203k loans assist those homes in need of non-structural repairs.
To qualify for this type of loan, a homeowner must live in the home they are
renovating. Here are the types of residences that qualify:
- Demolitions: Houses that need to be destroyed and rebuilt are eligible as
long as part of the foundation is intact.
- Existing Construction: This home must be at least 1 year old.
- Single-family, two-family, three-family or four-family properties.
- Condos: These must be approved for FHA loans.
- Mixed-use properties: A mixed residential/commercial property can qualify if you are repairing the living area portion.
- Homes you move to a new foundation.
What Home Repairs Qualify?
You must follow FHA guidelines. Lenders can help you find out what you need
Repairs allowed include:
- Disability access
- Heating, ventilation and A/C
- Roofing and floor coverings
- Energy conservation measures
- Kitchen remodels
- New appliances
- Additions of rooms
- Decks and patios
- Bathroom remodels
- New siding and stucco
- Finishing an attic or basement
- Grading the site
Repairs must be completed within 6 months and include all labor costs, even
if the owners are doing the repairs themselves.
How Much Will It Cost?
The total loan amount must include the price of the home, plus what the owner expects the repair cost to be. The buyer then puts down as little as 3.5% of the loan cost. This percentage is typically much lower than other conventional loans.
To apply, an applicant needs to have proof of income, proof of assets and
current credit reports on file. Also, the buyer will need to get a home
appraisal showing how much the home will be valued at after the repairs are
finished. A detailed proposal including work to be done with an estimate of
repair costs is also required.
If a 203K consultant is hired to help with paperwork, the consultant fees are
often included in the loan amount.
Other Things to Consider:
- If you cannot afford a finished home, an FHA 203K loan will help you fix
up your dream home.
- Only a small amount of lenders offer this kind of loan. Make sure you work with an expert.
- Prepare to spend some time working on documents. FHA 203K closings usually take 60 days.
- Interest rates may be a bit higher due to lender risk.
- Home improvements don’t guarantee that the home’s value will increase (but it usually does).
- Remember not to invest more in your home than you can sell it for later.
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