A Guide to FHA 203k Loans


FHA 203k loans

Do you want to get a loan to buy a fixer-upper and get cash to make repairs?

That’s what the FHA 203k Loan Program can do for you.

This article will go over everything you need to know about 203k loans, how they work, the requirements, and who is eligible.

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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 loans are government home loans guaranteed by the Federal Housing Administration and funded by private FHA-approved lenders.

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.

2020 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 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
  • Weatherization
  • Repair, replace, or add exterior decks, patios, 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

 

First-Time Homebuyers

A first-time homebuyer is defined as a person who has not owned a home within the last three years.

203k loans, like FHA loans, are only for borrowers who intend to occupy the property as their primary residence. First-time homebuyers can qualify, Investors do not.

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.

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

Down payment

MIP rate

MIP duration

30-year loan

<10%

>10%

0.85%

0.80%

Life of the loan

11 years

15-year loan

>10%

0.45%

0.70%

Life of the loan

11 years

Closing Costs

203k mortgage closing costs average somewhere between 2%-5% based on the lender and your credit score.

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. The amount depends on your credit score and the lender you use.

Make sure you get loan quotes from at least 3-4 lenders to ensure you are getting the most competitive mortgage rate.

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. Because of the increased risk, the minimum credit score for a 203k mortgage is 640.

If your FICO 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.

Standard 203k vs. Streamline 203k Loans

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.

Streamline 203k

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.

Standard 203k

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.

Units

Low Cost Area

High Cost Area

Guam, Hawaii, Alaska, Virgin Islands

1

$331,760

$765,600

$1,148,400

2

$424,800

$980,325

$1,470,475

3

$513,450

$1,184,925

$1,777,375

4

$638,100

$1,472,550

$2,208,825

203k Pros and Cons


Pros

Cons

  • List Low 3.5% downpayment requirement

  • 640+ credit scores qualify

  • Get extra money to make cosmetic repairs

  • Borrow money to make payments for 6 months

  • Get cash for major repairs or renovations

  • Low interest rates

  • Must hire a professional licensed general contractor (no DIY repairs)

  • Labor and time-intensive

  • Requires mortgage insurance premiums

  • Extended closing times

  • Strict underwriting requirements

  • Construction consultant required

203k Refinance

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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