Do you want to get a loan to buy a house, and get cash for repairs?
That’s exactly what the FHA 203k Loan Program can do for you.
In this article we are going to go over everything you need to know about the FHA Section 203(k) program.
Where to find them. How to qualify. The differences in a standard and streamline 203(k) mortgages. Which types of homes qualify, and more.
Rate Search: Check Current 203k Loan Interest Rates
What is a 203k loan?
Section 203(k) is a type of FHA home renovation loan that includes both the cost of buying a home and the renovation costs. It is given to those who choose to rehab a damaged or older home.
This home purchase and renovation loan is backed by the Federal Housing Administration and funded by 203k mortgage lenders. There are two types of FHA 203k renovation loans available, standard and streamline. We will explain the differences and go over the pros and cons.
FHA loans are also referred to as Section 203(b). The qualification for 203(b) is similar to 203(k) except for a couple of thins. One of which is the credit score requirement. You can qualify for FHA(b) with a 500 credit score with 10% down, and a 580 credit score with 3.5% down. With a 203(k) the minimum credit require is a 640 score. The required down payment is just 3.5%.
Pros and Cons of a FHA 203(k) Mortgage
- Low 3.5% downpayment requirement
- 640+ credit scores qualify
- Lower interest rates than traditional loans
- Get extra cash to make cosmetic repairs
- Borrow up to $35,000 for repairs or renovations
- Borrow money to make mortgage payments for up to 6 months
- Get cash for major repairs with standard 203k loans
- Must hire professional licensed contractors (no diy repairs)
- No eligible for investment properties
- Requires mortgage insurance premiums
- Extended closing times
- Construction consultant required
- Some lenders do not offer them
- Labor and time intensive
The home must meet FHA 203(k) eligibility requirements, but the purchaser also needs to meet the criteria set by the Federal Housing Administration to qualify.
- Lender must be FHA-approved
- 640 minimum credit score
- Solid employment history
- No late payments in the past 12 months
- No bankruptcies or foreclosures within the past 36 months
- Proof of income
- Two years of tax returns
- 3.5% Downpayment
203k Eligible Property Types
- 1-4 unit homes which have been completed for one year (townhouses and detached homes)
- 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 original foundation remains
Standard vs Streamline 203(k)
The standard version is for more extensive renovation projects, like structural repairs in which you are not able to occupy the home during construction. The other type is a streamline FHA 203k loan, which is for cosmetic repairs requiring up to $35,000 in funds.
A purchase contract will be the same as any other only you will want to add that it is contingent on you getting approved.
You used to have to get 2 separate loans to purchase a home and make cosmetic changes or repairs. With streamline loans you can now buy a home, and borrow money for repairs and have just one mortgage payment. A streamline 203k refinance eliminates quite a bit of paperwork that is required for a standard 203k mortgage making it simpler process.
An appraiser will give you a list of recommended repairs, and in some cases required repairs. You will get a bid from a contractor and pass it along to your lender. 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.
Type of work allowed:
- Roof repair, gutters, downspouts
- Existing HVAC systems
- Electrical and Plumbing systems
- Basement waterproofing
- Repair, replace or add exterior decks, patios, porches
- Window and door replacement and exterior siding
- Septic and/or well repair or replacement
- Improvements for accessibility
- Lead-based paint stabilization or abatement of lead-based paint hazards
Just like a streamline, the standard 203k loan allow you to get one loan for both the purchase of a home, and the cost of the repairs. Standard 203(k) are for homes that require major renovations, there is no limit for the amount of cash you’re able to receive to repairs.
There is 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 construction consultant that is assigned to oversea 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.
Type of repairs allowed:
- Major rehabilitation, such as the relocation of a load-bearing wall
- New construction, including room additions
- Repair of structural damage
- Repairs requiring detailed drawings or architectural exhibits
- Landscaping or similar “site amenity” improvement
- Any repair requiring a work schedule longer than three (3) months; or rehabilitation activities that require more than two (2) payments per specialized contractor
- Improvements that require a plan reviewer
- Improvements that result in work not starting within 30 days after loan closing; or cause the owner to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted
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.
PowerSaver Grant – Cash Back for Energy Efficient Improvements
In 2011 the Federal Housing Administration began the new FHA PowerSaver grant. The 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.
First-Time Home Buyers
A first time home buyer is defined as a person who has not owned a home within the last 3 years. 203k loans are great for first time home buyers, however they are available for all owner-occupied borrowers. 203k loans, like FHA loans are only for borrowers who intend to occupy the property as their primary residence. Investors do not qualify.
Because FHA 203k loans provide borrowers with additional cash over and beyond the purchase price of the home, it’s considered a risky loan. Because of the increased risk the minimum credit score for a 203k mortgage is 640.
If your score is below 640 and you are having trouble getting approved for a 203k mortgage. You should consider an FHA loan since it is the only mortgage for people with low credit scores. FHA loans require just a 500 credit score with a 10% down payment. If you have at least a 580 credit score you can qualify with just a 3.5% down payment.
Borrowers will need to meet the same requirements as an FHA loan to qualify. The qualifications for the two types of loans is very similar, besides the higher credit requirement of 620-640. The 203k down payment is just 3.5% of the loan amount.
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. Below is a 203(k) MIP chart.
203k loan closing costs Average are somewhere between 2%-5% based on the lender and your credit score. As an example a $200,000 house will have closing costs somewhere between $2,000-$7,000. Make sure you get loan quotes from at least 3 203k lenders. This way you can shop for the best rate and lowest closing costs.
203(k) Loan Limits
Standard Loan limits
Below are the loan limits for low costs areas of the country. About 65% of the country is classified as a low cost area. You can view the list of all low costs areas here.
|Loan Type||1 Unit||2 Units||3 Units||4 Units|
High-Cost Area Loan Limits
High cost areas are cities in which the cost of living is higher than other areas. This included cities like San Fransisco, Los Angeles, and New York City. You can view the list of all high costs areas here.
|Loan Type||1 Unit||2 Units||3 Units||4 Units|
Alaska, Guam, Hawaii, and the Virgin Islands
The National Housing Act states that these very high cost areas can increase the loan limit by up to 150%.
|Loan Type||1 Unit||2 Units||3 Units||4 Units|
The Final Verdict..
While buying a home that needs renovations can usually mean a good deal. You should really think about the drawbacks of these types of loans. They will take up much of your time and can often drag on for several months. If you’re patient and have the extra time to spend overseeing the repairs and dealing with contractors it 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.
Are you thinking about purchasing a home that needs work before you can live in it? If so, talk to a lender about the possibility of getting a 203k rehab loan. To start the process, fill out the convenient form on our home page. The 203k Lenders in our network will offer loan options that you can compare and choose to make your home ownership dreams come true.
Find more information about the 203k loan program on the HUD website.
RATE SEARCH: Get current 203k loan rates