The FHA 203k Mortgage Helps Buyers Finance The Fixer Home
The buy-and-rehab strategy can give home buyers instant equity, and a lot of it.
Homes in need of repair or updating can be had on the cheap, and the fixes may not be very expensive at all.
For instance, a house potentially worth $250,000 may sell for just two hundred thousand, when it needs only twenty thousand dollars in repairs. That leaves $30,000 in potential equity for a buyer with the initiative and drive to manage the fixes.
According to real estate data website Realtytrac, the median home price in a “distressed” sale was 42% lower than the price netted in non-distressed situations. That’s a big discount.
The problem comes, however, when the buyer goes to finance the home purchase.
Most mortgage programs require homes to be in near-top shape before the loan is approved.
That’s where the FHA 203k rehab loan comes in.
The Federal Housing Administration’s (FHA) 203k loan allows buyers to finance the home and up to $35,000 in repairs with one loan.
It’s possible to have lower payments and higher equity in your home the moment you move in, compared to your friends and neighbors. It’s time to take a closer look at the FHA 203k program.
What Is An FHA 203K Loan?
The FHA 203k loan aligns with FHA’s core mission of improving access to homeownership through lenient guidelines.
Home buyers with an imperfect credit history can qualify for an FHA loan more easily than for other types of mortgages. In fact, the FHA Back To Work program permits applicants to buy again just one year after a foreclosure or bankruptcy.
But the FHA program is good for high-credit home buyers as well. Why? The ultra-low downpayment requirement.
Arguably, the most attractive feature is its ability to grant pre-approval to buyers putting just a little over three percent down.
This downpayment flexibility applies to 203k buyers as well.
For instance, a home costing $180,000 and needing twenty thousand in repairs will require a downpayment of $7,000, or three and one-half percent of the purchase price plus repair cost.
FHA 203k buyers, in essence, receive a loan for repair costs at ultra-low, fixed FHA 203k loan rates, at a very small downpayment.
Instead of having two loans, the buyer ends up with one FHA loan that covers both the purchase price and rehab expenses.
FHA Streamlined 203k: Easily Finance Cosmetic Repairs
The Federal Housing Administration offers two varieties of the 203k loan - the streamline and the standard.
The streamlined 203k program allows homebuyers to finance up to $35,000 into their mortgage to improve or upgrade their home, before or after move in.
The program also allows buyers to refinance, adding up to $35,000 to their existing mortgage to update their current home.
The streamlined 203k is the more popular of the two programs, and more lenders offer it. It facilitates mainly cosmetic and safety-related renovations to a home for which plans, consultants, engineers and/or architects aren’t required.
This program can be used for almost any renovation or repair that does not involve structural changes.
The streamlined version of the program can finance the following types of repairs.
- Kitchen and bathroom remodels
- Exterior or interior painting
- Repair or replacement of flooring
- Roofs, gutters and downspouts repair
- Repair or replacement of HVAC, plumbing and electrical systems
- Appliance upgrades
- Door and window replacement
The home doesn’t have to be unlivable to qualify for an FHA 203k. The program is designed to fulfill the buyers nice-to-haves as well.
Buyers often find a home with a good footprint on a desirable property. But, perhaps it needs a bathroom remodel, new kitchen appliances, carpet, and high-efficiency windows.
The home could financed with any mortgage program.
But, the buyer might choose an FHA 203k to finance these amenities at a low cost, and increase the home’s value and comfort.
FHA Full 203k: Rebuild A House From The Foundation Up
The standard 203k program is used to cover more involved renovations and repairs that exceed $35,000 in cost.
Home buyers can complete extensive structural work, such moving walls or adding bedrooms and bathrooms, if the footprint of the home does not change.
It can even be used to rebuild the house in total, as long as the foundation remains intact.
The type of work generally allowed for a standard 203k program consists of the following:
- Adding or removing walls
- Energy conservation improvements
- Adding accessible features for a disabled person
- Remediation of health and safety issues
- Adding a second story
There are other benefits to the standard 203k loan.
One challenge home buyers face is where they will live during construction. Major repairs could keep the new owners from moving in when the home purchase is complete.
For this situation, the full FHA 203k loan permits applicants to finance up to six months of mortgage payments into the loan. This allows buyers to maintain an alternative residence while repairs are being made.
FHA 203k Loan Eligibility
The 203k mortgage is an FHA-insured home loan, and follows the same eligibility guidelines as a standard FHA mortgage.
As with all FHA loans, borrowers will need to document their income and meet allowable debt-to-income ratio requirements.
Although FHA has a much lower written minimum score, most lenders will require a minimum credit score of 580. Some may require a higher score for a 203k loan.
Home buyers must plan to live in the home they purchase and renovate. These mortgages are not meant for investors; they are designed from the ground up to get renting families into homes.
The 3.5 percent downpayment can come from family members via financial gifts. Home buyers without contributing family members might consider FHA’s $100 down program.
The full loan amount for a 203k loan can be up to the maximum FHA loan limit for the area in which the property is located. These loan limits are generous, large enough for most properties in the cities and towns for which they apply.
One more consideration: your total loan amount must be about the same as the future value of your home after improvements, according to an appraiser’s valuation.
Typically, the amount the home will be worth is more than the purchase price and repair costs combined. If it’s not, reconsider the price you are paying for the home and the type of planned upgrades.
You should be able to gain a good amount of equity by using a 203k loan, instead of buying a turn-key home.
What Are Today's 203k Loan Rates
The FHA 203k loan works great for foreclosures or other properties in need of rehab work. You can even refinance out of the FHA loan and into a conventional loan after you built up your equity from repairing the home.
Check out today’s 203k loan rates. Rates are available at no cost and your social security number isn’t required to get started.