What is an FHA 203k loan?
An FHA 203k loan, is also known as a Rehab Loan or FHA Construction loan. This kind of loan allows you to finance repairs to the property, and lets the buyer add personalized touches to their new home! As with all FHA or HUD products, the borrower must plan on living in the home as their personal residence. Through the process the lender tracks and verifies that the repairs are being completed, and is able to lend on homes that usually don’t qualify for a loan (typically lenders don’t approve loans for homes in need of major repair). The FHA 203k loan allows a buyer to purchase and fix a property within one transaction.
A standard FHA 203k loan is only offered by select lenders, and the process is much more rigorous than an FHA 203k Streamline loan. I would recommend going with a streamline loan because it allows for up to $35,000 in repairs. If you are a first time home buyer I would not suggest looking at properties that need more than $35,000 in repairs, because the construction process can become lengthy and tiresome.
The FHA 203k Streamline Loan:
This loan allows a borrower to finance up to $35,000 in repairs. The FHA 203k loan requires a 15 percent “buffer” (called a contingency fund) on the total amount of the combined bids (in case there are any overruns or minor unforeseen costs). If a portion of the contingency fund is not used, then it is credited back to the borrower. Therefore the “real” maximum amount, that the total cost to repair the property, cannot exceed $31,000. Keep in mind, this loan is only for non-structural and non-luxury repairs (no tennis courts). Although, you may upgrade to granite counter tops and gut the bathrooms.
What Can the Construction Loan be Used For?
- Roof repair or replacement
- Repairing safety and health issues
- Energy-efficient improvements
- Apply for a loan with an FHA 203k streamline lender (ask your lender if they have completed this kind of loan within the last year. Hopefully the answer is yes!).
- Get approved.
- Find a contractor.
- Get bids for the work (I recommend getting up to 3 bids, and make sure that the contractors are giving you quotes for “apples-to-apples” repairs. i.e. using the same materials).
- Finish all of the paperwork and close the loan.
- Have the contractors complete the repairs.
- Move in to your new home!!!
Hack: HUD has a search page that will allow you to see if your lender successfully completed at least one 203(k) rehab loan in the last 12 months (type your lender’s name into the search bar located at the top of the page and then check the box for 203(k) rehabilitation mortgage insurance program).
- Credit score: FHA requires a minimum credit score of 580, but many lenders may require a score of 620-640 to qualify. Check with your lender for their specific requirements.
- Down Payment: FHA loans require a 3.5 percent down payment (based on the purchase price + total cost of repairs). If you are short on the down payment, you may receive a gift from your family to help you purchase a property.
- Debt-to-Income Ratio: You should speak with your lender about their particular requirements.
- Loan amount: You can finance up to 110 percent of the property’s future repaired market value (home price + repair costs). Since the FHA 203k is a type of FHA loan, they are subject to your region’s FHA loan limits.
- Occupancy: This loan is for owner occupants only (no investors).
In conclusion, the FHA 203k streamline loan is a great way to purchase a home and add a few personal touches to the property prior to moving in. Are you interested in the FHA 203k streamline loan? Do you have any particular questions about who to talk to regarding a certain question? Comment below.