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The 203K is today’s home improvement loan

Tom KellyThe Mortgage Reports Contributor

FHA 203k: cash for home improvement

Despite today’s home buyers having an abundance of low- and no-downpayment mortgage options, meeting minimum downpayment requirements can be a challenge — especially because home values are climbing nationwide.

The choice to make a downpayment gets even tougher when we consider that very few homes are “move-in ready”.

Buyers often want to make minor (or major) repairs to a home after moving in, and home repairs cost money — money which may have been used on a downpayment.

The FHA 203K program accommodates this trade-off.

Available via the Federal Housing Administration, the 203K loan lets a buyer make the minimum 3.5% downpayment while also allowing the buyer to finance home repairs directly with the mortgage.

There’s no similar program available via Fannie Mae and Freddie Mac.

Via the 203K, a borrower can finance both the purchase of home, and its subsequent repairs.

Click to see your FHA loan eligibility (Sep 19th, 2018)

The FHA home construction loan

The FHA 203K loan is today’s “home construction loan”. It allows a home buyer to finance home repairs into a mortgage, directly.

The program is not just limited to home buyers, however. Exiting homeowners can use the 203K to finance home repairs and home improvement projects, too.

The refinance version of the 203K pays off all existing loans against the home, then provides additional funds to be used for home repairs.

Because the loan is backed the FHA, lenders are insured against loss, which contributes to the program’s relatively low interest rate as compared to other construction loans available via banks.

The FHA 203K loan can also come in handy in a foreclosure sale, where a home has fallen into disrepair. 203K loan proceeds can be used to pay for updates to the home, and to provide your final loan financing.

The total mortgage balance can exceed the purchase price of the property.

Click to see your FHA loan eligibility (Sep 19th, 2018)

Should you choose the Limited 203k?

There are two versions of the 203K loan. There is the “standard” version, and also a less complicated “Limited” version (formerly known as the FHA 203k Streamline).

The Limited 203K is less paperwork-intensive and is typically used when home repairs are considered minor in nature — improvements such as new cabinets, or appliances.

And, as compared to the “full” 203K, which has been available to buyers and homeowners for more than three decades, the Limited 203K is relatively new.

Roughly 10 years ago, the U.S. Department of Housing and Urban Development (HUD) had a lot of homes in its inventory that needed cosmetic overhauls before an interested buyer would make an offer on them.

The Limited was introduced as a way for consumers to buy HUD foreclosures inexpensively, while allowing for simple repairs of up to $35,000 to make a home more livable.

Based on the success of the program, the FHA 203K was extended to all home buyers for repairs after purchaser, and to existing homeowners as part of a refinance.

Today, the 203K is among the market’s most popular home construction loans.

The difference between Limited and Full 203k loans

Between the two FHA 203k loan types, there are additional difference beyond the Limited version requiring less paperwork.

As one difference, when using the Limited 203k, the FHA will not require sign-offs from a certified general contractor, nor will it allow you to borrow more than $35,000 for repairs.

By contrast, the full 203K loan requires an accompanying project plan and there’s no set limit to the amount of cash you can borrow for repairs.

Furthermore, with the Limited 203K, repairs and improvements are limited to non-structural elements. This means that the Limited 203k cannot be used to move a load-bearing wall within a home.

Landscaping projects are also ineligible.

Lastly, cash-back refinances are not permitted with the 203K, and existing owners must be able to show that they have occupied the home for the previous 12 months.

What are today’s 203k mortgage rates?

Buying a home in need of repairs or improvement? Postponing maintenance on your own home because of cash concerns? Consider the FHA 203k, which may be the solution to your housing and budget needs.

Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Click to see your FHA loan eligibility (Sep 19th, 2018)