What is an FHA 203 (k) loan?
An FHA 203 (k) loan is a type of government insured mortgage that allows the borrower to take out a loan for two purposes: buying a home and renovating a home. An FHA 203 (k) loan is wrapped around the rehabilitation or repairs of a house that will become the property of the mortgagor Principal residence. An FHA 203 (k) is indeed an FHA ready to build.
Key points to remember
- An FHA 203 (k) loan is a government guaranteed mortgage loan that is essentially a construction loan that finances both the purchase and repairs of a home.
- These loans are intended to support the home ownership of low income households, allowing them to upgrade and update older properties as a primary residence.
- The FHA offers different varieties of 203 (k) loan depending on the extent of the repairs needed.
Understanding FHA 203 (k) Loans
The FHA 203 (k) loan aims to encourage low to moderate income families to purchase homes in urgent need of repair, especially homes in older communities. The program allows an individual to buy a house and renovate it under a fixed rate Where adjustable rate mortgage loan. The amount borrowed includes the purchase price of the house and the cost of the renovation, including materials and labor hired.
The loan can also cover financing for temporary housing (if needed), which can take the form of rent for the period that the house is being rehabilitated. Dual-use loan eliminates the need for a borrower to make two separate applications for a mortgage loan and a home improvement loan, either of which may not be approved by the bank or may have a combined cost. higher.
Normally, lenders are unwilling to offer a mortgage for a property in need of major repairs due to their standards of safety and habitability. The FHA 203 (k) loans, which are backed by the government, reassure lending institutions that the cost of renovating the home is included in the mortgage package. Renovation costs are placed in a escrow account and disbursed as payment to contractors as work is completed. The complete renovation of the house should not take more than six months, as stated in the FHA guide for a 203 (k) loan.
203 (k) loan types
There are two types of 203 (k) loans: limited 203 (k) and standard 203 (k). Loans only apply to individuals and families who intend to make property their primary residence. This means that real estate investors and house-fins does not qualify. The work carried out must be entrusted to an authorized handyman. If the mortgagor is one, he can act as his own general contractor and carry out the repair work himself, using the money saved for cost overruns or additional improvements. However, they cannot be reimbursed for their work.
Limited 201 (k): Minimum repairs
A house that doesn’t require a lot of work would generally be paid for using the 203 (k) limited. This option does not include structural work on the house, such as adding new rooms or landscaping, and the house must be habitable throughout the renovation period. Repairs under the 203 (k) limited are capped at $ 35,000.
Standard 2013 (k): Intensive work
The 203 (k) standard includes all major repairs and structural work that must be done in the home without a capped repair cost. The minimum amount that can be borrowed is $ 5,000.
Some of the repairs covered by an FHA 203 (k) loan include plumbing, flooring, painting, heating and air conditioning systems, bathroom and kitchen renovations, upgrading to standards. health and safety, landscaping, the implementation of access tools for people with disabilities, the addition of energy saving systems and the replacement of windows and doors. Renovations considered extravagant or luxurious (such as tennis courts, gazebos, and new swimming pools) are not covered by an FHA 203 (k) loan.
How do lenders use an FHA 203 (k) loan?
The Federal Housing Administration (FHA) was established in 1934 during the period of the Great Depression, which experienced a high rate of seizures and default values. The FHA has been used to influence banks to give home loans to low and middle income people, to low income people credit scores, and first-time homebuyers without credit history. This helped boost the economy as people who would not normally be approved for a loan were given mortgages. The FHA loan was created to insure these types of mortgages, so that if the borrower defaults, the FHA steps in to cover the payments, thus minimizing the risk of default that the lender faces.
Higher income people generally prefer to buy in newer, more developed areas of a city. The FHA introduced the 203 (k) loan specifically to encourage low-income people who don’t qualify for a standard mortgage to choose to live in run-down neighborhoods and upgrade them.
Get an FHA 203 (k) loan
It is important to note that the FHA is not a lender; rather, it is a mortgage insurer. You get an FHA 203 (k) loan by applying to your bank, checkout, or another lender. Not all lenders offer these loans. To find an approved lender, check out the HUD Approved Lender Finder.
The FHA is also not a home insurer or warranty provider. Home buyers should always purchase home insurance and warranties for their home and property.
Pros and Cons of FHA 203 (k) Loans
As with other FHA loans, an individual can make a down payment of only 3.5%. As the loan is FHA insured, lenders may offer lower interest rates for a 203 (k) loan compared to what borrowers may be quoted elsewhere. Interest rates will vary for each borrower based on their credit history.
However, the FHA 203 (k) loan is not free of costs. a initial mortgage insurance premium must be paid monthly by the borrower. Additional assembly costs may also be charged by the credit institution. In addition to the financial costs to the borrower, the rigorous paperwork required and the time it takes to get a response from the FHA and the lender are factors to consider when applying for this program.
Overall, a person with a low credit score who is looking to own a home that may need to be repaired and upgraded may find that FHA 203 (k) has great benefits that outweigh its advantages. costs.
FHA 203 (k) against construction loans
While an FHA 203 (k) loan is a type of FHA construction loan, it is possible to obtain construction loans outside of the FHA program. A construction loan is typically a short-term loan that provides financing to cover the cost of building or renovating a home.
Construction loans can have higher interest rates than conventional mortgages. The money can be paid in installments as construction starts and continues, rather than as a lump sum. The balance owed on a construction loan can be paid in one go at the end of the loan term. Alternatively, homeowners can choose to convert a construction loan to a conventional mortgage.
If your lender doesn’t allow the automatic conversion of a construction loan to a conventional mortgage, you may need to apply for a brand new loan to avoid having to make a big one. balloon payment.
FHA 203 (k) Loan conditions
If you are interested in an FHA 203 (k) loan, it is important to understand what you will need to qualify. The first step is to find an eligible lender if you haven’t already. Next, you will need to make sure that your goal of obtaining the loan meets the FHA 203 (k) guidelines. Again, these types of loans can be used for:
- Structural changes and reconstruction
- Modernization and improvement of the function of the house
- Elimination of health and safety risks
- Changes that improve the appearance of the property and eliminate obsolescence
- Repair or replacement of plumbing and installation of a well and / or septic tank
- Addition or replacement of roofing, gutters and downspouts
- Addition or replacement of soils and / or soil treatments
- Major landscaping and site improvements
- Improve accessibility for a disabled person
- Improve energy conservation
If the property meets these guidelines, you can proceed with the application process. The qualification requirements for an FHA 203 (k) loan are similar to the requirements for a regular loan FHA loan, in terms of credit rating, income, down payment requirements and FHA loan limits. This means that you will need a credit score of at least 580 to complete the purchase with a 3.5% down payment. The typical score required to get a standard mortgage is 620, although some lenders require a score as high as 740.
It is possible to qualify for an FHA 203 (k) loan with a credit score as low as 500, although this requires you to increase your down payment to 10%.
What is an FHA 203 (k) loan?
An FHA 203 (k) loan is designed to be used for the purchase and renovation of a home. There are two types: limited and standard. The amount borrowed represents both the purchase price of the home and the renovation costs, which include materials and labor. It is meant to help rehabilitate dilapidated communities and help low-income people.
Does the FHA make the loan?
No. The FHA insures the loan. You need to get the loan from a financial institution like a bank or a credit union.
Can you use a 203 (k) loan for all upgrades?
No. Anything considered extravagant or luxurious, such as a tennis court, gazebo, or new swimming pool, is not allowed. However, most repairs and upgrades are eligible, including the overhaul of an existing pool.