FHA Renovation Loans (203k)
Borrowers interested in purchasing a property that is in need of renovations or repairs can acquire an FHA 203k loan. Also known as an FHA renovation loan, the FHA 203k loan allows borrowers to purchase a home and acquire money to renovate it within the same loan. An FHA renovation loan is both more affordable and convenient than taking out a mortgage loan and then taking out a loan for renovations, though it does have some requirements that need to be met.
The Purposes of the FHA 203k Renovation Loan
An FHA 203k renovation loan can be used by borrowers to:
- Purchase a fixer-upper home that is being sold “as is”and may need upgrades, repairs, or renovations.
- Purchase a foreclosed upon property or a short-sale property, which may be in need of repairs.
- Restrictions on the 203k Rehab Loan
Like conventional FHA loans, the 203k rehab loan has relatively broad requirements for borrowers but more stringent requirements for properties. Borrowers will need to put at least 3.5% down on the mortgage loan. They should also have a credit score of at least 620. The maximum amount of the loan is 96.5% of the home’s after-improved value.
203k rehab loan requirements for borrowers include having a solid employment history, having no late payments in the past 12 months, and not having a bankruptcy or a foreclosure in the past 36 months. Proof of income and two years of tax returns will need to be provided to meet 203k rehab loan requirements.
Rules and Restrictions
FHA 203k loan requirements include a professionally licensed contractor, so repairs cannot be DIY. This type of loan is not open for investment properties, only properties in which the borrower will live. Eligible properties include single-family dwellings, townhomes, detached homes, 1-4 building condos, manufactured and mobile homes, and demolished properties where the original foundation still exists.
There are also some drawbacks to the FHA 203k loan program. The FHA 203k loan program can have interest rates as much as 1% higher than a standard FHA loan. There are extended closing times involved in an FHA 203k loan, which sometimes takes as much as 6 months to close. Further, loans can only be acquired through FHA 203k loan lenders, and FHA 203k loan lenders may be quite rare.
The Advantages of a 203k FHA Loan
The 203k FHA loan empowers borrowers to purchase properties that are below market price, with the ability to renovate these properties and revitalize the surrounding neighborhood. With a low down payment of 3.5%, the FHA loan product guarantees that the borrower will have the funds to complete their renovation — rather than the borrower having to purchase a home and later secure an additional loan
An FHA 203k rehab loan further allows the borrower to roll in the first few months of their mortgage payments into their renovation loan. Up to six months of the mortgage payments can be included if the borrower cannot live in the home while it is being renovated.
Types of FHA 203k Rehab Loan
There are two different types of renovation loan. The Limited K loan is intended for properties that don’t need extensive repairs, such as properties that have no structural damage. This is a loan intended for properties that require $35,000 or less in renovation and repairs. The Consultant K loan is what is often considered a standard 203k renovation loan. This loan offers funding for $35,000 or more in renovations and repairs.
Acquiring an FHA 203k rehab loan gives a borrower the ability to both purchase and build the home that they desire. Through this type of loan, a borrower may be able to get the perfect property at a below market rate.
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