203K – What are FHA 203K Home Loans?
Buying an imperfect home in need of a little TLC can make a very appealing investment. Firstly, the competition for this type of property is much less and there is the potential to save literally thousands on the initial market price. Most buyers are looking to buy a home that is ready to live in, but with a bit of planning and work, the imperfect home is a wonderful choice for those up for a challenge.
Understand the FHA 203K loan
The FHA 203K loan (also referred to as an FHA Construction loan or Rehab Loan) gives the option to finance the purchase of a home and cost of wanted or needed repairs. Even though the lender will be involved in verifying and tracking the repairs, it is a great option to obtain a loan on the type of property that isn’t normally accepted for a standard mortgage.
Typically, a mortgage lender will not approve a loan on a property in need of significant repairs. Most lenders prefer the homes that are in a well-maintained and livable standard. The 203K loan is perfect for those homes that have been neglected or run down.
Also, the ability to get finance for both the home purchase and repairs in a single transaction means the entire process of applying for credit is made so much less complicated.
Finding the right 203K lender
The 203K loan package is not offered by every lender. Also, not every mortgage broker or loan officer is fully aware of this product, so it is essential to find a lender that has long-term experience and is officially approved to work with this type of loan.
A simple way to see if a particular lender has worked with the 203K loan in the past is to refer to the relevant HUD search page. You will need to visit the site and enter the name of the company to get a quick glimpse of their past history.
Who can apply for this loan?
The 203K loan forms part of the highly favored FHA loan program that is intended to help individuals that aren’t in the best place to obtain a mortgage. There is plenty of flexibility when applying for an FHA loan, so the ability to qualify for a 203K is a lot more straightforward than a regular construction loan.
The standard qualifying criteria consist of:
Credit score – the typical FICO credit score for this type of loan is in the region of 580 (at its lowest point). However, there are plenty of lenders that only accept applicants with a score closer to the 640 mark. Even at this range, it is still easier to qualify compared to a conventional construction loan that most lenders require a score of 720+.
Down payment – the down payment rules that apply to the 203K loan are based on a percentage of 3.5% of the purchase price of the home plus the total renovation costs. For instance, if you are looking to buy a home at $300,000 and make repairs at $35,000, the total amount to base the down payment is $335,000. At 3.5%, this would amount to $11,725.
Debt-to-income ratio – lenders will take a careful look at a borrower’s debt payments and income. Ideally, the lender wants to see a debt-to-income ratio that has less than 43% of the total income going towards the monthly mortgage payment and other bills. For instance, for the homeowner with a monthly income of $4,500, the total outgoings for the mortgage plus, credit card bills, student loan, auto loan, etc. should not exceed $1,935 on a monthly basis.
Loan amount – the FHA loan limits give the borrower the option to apply for a loan that is up to 110% of the future value of the property. Alternatively, it can be based on the total home price and the full costs of repairs or renovation work.
Full-time occupancy – any property purchased using the 203K loan should be used as a primary place of residence. If a property is being bought with the intention to fix up and sale, this type of loan isn’t a viable option.
What repairs can I do?
The repair options on the 203K loans are quite wide ranging. However, there are two types of FHA 203K loan: 203k standard and 203K Streamline. The loan package chosen will depend on the amount of renovation work needed.
The 203K Standard gives the greatest flexibility in the type of renovation work that can be carried out.
A few of the options include:
- Making structural alterations to the property
- Converting the interior of the home to make a 2 or 3 unit home instead of a one-family home
- Have the property connected to public water or sewer
- Make the home more accessible to disabled people
- Work on large scale landscaping projects
The 203K Streamline is the preferred option to complete minor projects, such as replacing the bathroom or kitchen. This gives the borrower the option to apply for up to $35,000 to work on non-luxury, non-structural repairs.
A few of the options include:
- Remodeling the bathroom and kitchen
- Replacing old appliances
- Renovating the flooring and carpet
- Replacing the roof
- Rectifying issues with health and safety matters
However, this type of 203K loan does not permit structural changes to the property, such as adding rooms or moving load-bearing walls.
How do I apply for a 203K loan?
If you are looking to apply for an FHA 203K loan you want to make sure to shop around to find the best interest rates, terms and conditions. With the 203K loans it will benefit to find the lender and contractors with experience to enjoy the smooth progress of buying a home and having repairs completed to a high standard.