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What is a 203k loan?
203k loans are a type of renovation loan that includes funds to purchase the property plus additional funds to make home improvements and repairs. A minimum 640 credit score is required with a 3.5% down payment.
203k Loan Requirements
The home must meet FHA 203(k) eligibility requirements, but the purchaser also needs to meet the Federal Housing Administration’s criteria to qualify.
FHA 203k Loan Requirements
- Minimum 620 credit score
- 3.5% down payment required
- 24 month waiting period after a bankruptcy or foreclosure
- Maximum 43% debt-to-income ratio
- For primary residence only
203k Eligible Properties
203k loans allow you to purchase a single-family home or a multi-family home of up to 4 units. You must occupy one of the units as your primary residence to be eligible.
Eligible Home Types
- Single-family homes
- 1-4 unit homes which have been completed for one year
- 1-4 building condos (interior improvement only)
- Houses and modular units off-site that can be moved to a property
- Conversions of single units into 2-4 unit dwellings
- Tear down or demolished properties where at least a portion of the original foundation remains
FHA 203k Types of Work Allowed
- Painting, flooring, and new appliances
- Electrical and Plumbing systems
- Basement waterproofing
- Repair, replace, or add exterior decks, patios, and porches.
- Window and door replacement and exterior siding
- Septic and well repair or replacement
- Improvements for accessibility
- Lead-based paint stabilization or abatement of lead-based paint hazards
How to Qualify
- Down Payment – Borrowers with a 580 or higher credit score can qualify for a 203k loan with a 3.5% down payment. The qualifications for the two types of loans are very similar, besides the higher credit requirement of 620-640. The 203k down payment is just 3.5% of the loan amount.
- Closing Costs – Closing costs are fees charged by lenders for funding a mortgage loan. You’ll pay between 2% and 5% of the loan amount in closing costs. Closing costs average somewhere between 2%-5% based on the lender and your credit score.
- Credit – Minimum 640 credit score required. Because rehab loans provide borrowers with additional cash over and beyond the home’s purchase price, it’s considered a risky investment.
- Mortgage Insurance Premium – The mortgage insurance premium or MIP on a 203k loan is typically 0.85%. The rate will change according to how much the loan is for and your down payment amount.
$625,500 Loan Amount and Lower
Life of the loan
Life of the loan
Standard 203k vs. Streamline 203k
The standard version is for more extensive renovation projects, like structural repairs in which you cannot occupy the home during construction. A purchase contract will be the same as any other, and only you will want to add that it is contingent on you getting approved.
With a streamline 203k loan you can buy a home, borrow money for repairs, and have just one mortgage payment. An appraiser will give you a list of recommended repairs, and in some cases, required repairs.
You will get a bid from a licensed contractor and pass it along to your lender. The maximum cash amount you can receive is $35,000. You will have a time frame to have the repairs completed for the final appraisal. Once the construction is complete, you will be ready for closing.
The standard 203k loan is for homes that require major renovations; there is no limit to the amount of cash you’re able to receive for repairs. There are more intensive paperwork requirements for the standard 203k loans. Buyers will not be permitted to occupy the property. However, you are allowed to add up to 6 months of mortgage payments into the loan.
You will have a HUD consultant that is assigned to oversee the work that is needed. The amount of additional paperwork and time involved in these types of loans often discourage many lenders from offering them.
PowerSaver Grant – Cash Back for Energy Efficient Improvements
The FHA PowerSaver Grant program will pay up to 1% of the origination fee or closing costs for borrowers who send at least $3,500 on eligible energy-efficient improvements.
This equals roughly an average of a $2,000 refund on 203k loans. Get more information on the PowerSaver Grant on their website.
203k Loan Limits
The loan limit will depend on the county you are buying a house in. In low-cost areas, the loan limit is About 65% of the country is classified as a low-cost area.
Low Cost Area
High Cost Area
Guam, Hawaii, Alaska, Virgin Islands
203k Pros and Cons
You can refinance your current mortgage into a 203k loan and get the extra cash to make repairs and renovations. The same rules apply to streamline and standard 203k loans.
Instead of having to borrow money on a credit card or taking out high-interest loans for home renovations, with a 203k refinance, you can get the money for repairs and roll the costs into your mortgage.
The Bottom Line
While buying a home that needs renovations can usually mean a good deal. You should think about the drawbacks of these types of loans.
If you’re patient and have the extra time to oversee the repairs and deal with contractors, the 203k renovation loan could be well worth it.
In the end, you will have a home that is livable and suits your needs once you’ve completed the repairs.
Find more information about the 203k loan program on the HUD website.
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