FHA 203K HOME LOAN -- A Great Buy and Repair Mortgage Tool

Purchasing a fixer-upper is a very popular entrance to homeownership. While the mortgage process generally can be unsettling for the faint-at-heart, having the right guidance and loan product helps to ease the way toward realizing a new home.  The full potential of a fixer-upper is --whether it will be used for a short-term residence and resold later or for a lifetime home - unlocked with proper renovations.  Unfortunately, for many homebuyers, it is a tremendous challenge to come up with the funds for the down payment and the repairs and upgrades that the desired home may need.  This is why I like the FHA 203 (k) for my clients who face these types of money challenges because it can help make their dream of owning their first home a reality.  

Now, before going further, it is very important that you understand that if you are considering an FHA 203(k), this is not a loan intended for investors.  The borrower's use of an FHA 203(k) must be to purchase and renovate a home that they intend to occupy as their residence.

Obviously, the process is divided into 2 major steps:  (1) the acquisition of the home to be renovated and (2) the actual renovation of the home.

(1) Acquisition of the home presents the first obstacle of concern -- money for the downpayment.  Not having enough money for a downpayment is usually a challenge for persons seeking to purchase their first home. This challenge becomes a minimal concern with the use of the FHA 203k Construction Loan.  The FHA 203K allows the homebuyer to place as little as 3.5 percent of the purchase price as a downpayment.  Indeed, the FHA 203 (k) makes it much easier for a homebuyer acquire the first home that may need some repairs and upgrades.

(2)  After the homebuyer has purchased the home, the second concern is obtaining the money for its renovation.  The FHA 203k Construction Loan takes care of this financial challenge as well.

So, getting a mortgage for the acquisition of your next home and renovating it can be accomplished all in the same lending transaction with an FHA 203k home loan. It is a great program to consider when faced with money challenges to purchase a home; particularly a home that needs repairs and upgrading. The FHA 203k home loan program offers a mortgage that combines both goals-- acquisition of the home and the renovation of it.  

The FHA 203 (k) makes navigating the purchase-to-renovation process easier because you have the option of living in the new home while it is undergoing a renovation. Or, if that is not suitable for your situation, the FHA 203k will cover the mortgage payments even if the home cannot be lived in during the renovation phase.

2 Types of FHA 203k Loans:  Limited (Streamlined) and Standard

• The limited or streamlined 203(k) loan is considered the easier 203K loan to acquire because the application process is less paperwork than the Standard 203k.  The maximum amount that you can borrow for the renovation (improvement and repairs) is $35,000 or less. If the renovation costs of the home exceed $35,000, a HUD consultant will be required to supervise the use of the funds and ensure that FHA 203k funding is appropriately being used.

• The standard 203(k) is used when the amount needed for the improvement and repairs total more than $35,000; and so a HUD consultant will be involved in the renovation phase. The Standard 203 (k) has more paperwork involved in the application process, but it is well worth the trouble.

Regardless of which type of 203(k) loan you acquire, HUD requires a minimum of $5,000 to be spent on rehabilitation of the home.  Generally, the maximum amount you can borrow for the mortgage is the lowest of the following:

•    The home's new value after the repairs and improvements are completed. This is known as the "After Repair Value or ARV.
•    The home's value “before” the repair and improvements plus the total costs of those repairs and improvements.
•    The FHA's maximum limit for the area in which you are purchasing the home.

In order to get an FHA 203(k) loan, you must apply with an FHA-approved lender It’s also important to understand that the FHA loan limits are based on the FHA guidelines for the area in which the home is located.  FHA designates a loan limit for every county in the United States. Some counties have the same limits and others have higher limits.  I always advise my clients to take a look at loan limits so we can make an accurate calculation of how much of a downpayment they will need for the county in which they will be seeking to purchase their home.   Here are the loan limits for every county in the U.S.

The timeframe for completing the repairs and improvements is six months from the day of closing; and the work on the repairs and improvements of the home must begin within 30 days of closing the loan.

Also, luxury type items may not be purchased and included with the repairs and improvements using an FHA 203(k) loan. So, items such a new swimming pool may not be included.  The repairs and improvements must be limited to the following, according to FHA guidelines:   

• Plumbing and sewer system upgrading
• Make the home energy efficient
• landscape upgrading
• Replacement and/or installation of the flooring
• Repair or replacement  the gutters and roof
• make the home disability accessible when necessary
• Upgrade the home so that it’s accessible to disabled persons
• Repair, treat or demolish health and safety hazards

How to qualify for a 203(k) loan

FHA loans were created to allow people to buy a home with a smaller down payment. The minimum amount for a down payment is 3.5 percent of the total loan amount that includes both the cost of the house and renovations.

A credit score of at least 580 is needed to be approved for the loan at the 3.5 percent down payment. However, it’s also possible to get an FHA loan with a credit score as low as 500 — but you’ll have to make a down payment of 10 percent. Even with these lower credit requirements, though, keep in mind that many lenders require a score of 620 or higher. 

The loans require an upfront mortgage insurance payment of 1.75 percent of the total loan amount, which can be wrapped into the financing.  Borrowers also pay a monthly mortgage insurance premium based on the loan-to-value ratio and length of the mortgage.

This article is written by: 

Frederick W Ford

Insurance, Mortgage, Real Estate and Retirement Advisor

NMLS 640619

This article is intended for informational purposes only and is not intended as an advertisement nor solicitation.