Everything You Need to Know about FHA 203k Home Improvement Loans

Summary: An FHA 203k loan would be ideal when you are planning to buy an older home that needs repairs. Find out everything you need to know about FHA 203k loans before signing the agreement.

If you are buying a home that needs some improvements to be made, an FHA 203k loan could be your best bet. Not only do these come at a low-interest rate, but they are also easily available.

Many mortgage lenders who contact might offer you FHA 203k loans. However, before signing up with any of these, it is better you understand what you are getting into.

What is an FHA 203k Loan?

An FHA 203k loan is a loan that is backed up by the federal government to provide funds to buyers who wish to buy older homes that need repairs. For instance, if you wish to purchase a home that requires a brand new kitchen and bathroom, you can approach an FHA 203k lender . Such a lender will give you the money that you need to purchase the house and also the funds that you would need, to make the necessary renovations.

An FHA 203k loan includes:

• A contingency reserve amounting to up to 20 percent of the home value to help you complete your remodeling project in case the actual cost exceeds the estimated cost.

• A provision that offers six months of mortgage payments, to make it possible for you to live elsewhere during the process of remodeling.

Which are the repairs that qualify under FHA 203k home improvement loan?

FHA 203k loans are of two types. You can apply for a regular or standard 203k loan if you are buying a property that requires structural repairs, a new garage, landscaping, or remodeling. If the property needs non-structural repairs, new roofing, new appliances or any energy conservation improvements it is better to go for the second type of FHA 203k loan which is known as the limited or the streamlined 203k loan.

An FHA 203k loan will cover any repairs to decks and patios, flooring, plumbing, kitchen and bathroom remodels, new siding, new heating and conditioning systems, and any new additions to home such as another story that becomes a permanent part of the property. Luxury improvements such as a swimming pool or a tennis court are not covered by the program.

How much can you borrow through an FHA 203k Loan?

The maximum amount that you can borrow via an FHA 203k loan from a FHA approved lender who comes to you, depends mainly on the type of loan that you apply for. In case of a regular FHA 203k, you will have to borrow a minimum amount of $5000. The maximum amount depends on the Nationwide FHA Mortgage Limits or the appropriate LTV (Loan-to-Value) ratio.

In case of a streamlined loan, the maximum amount that you can borrow is $35000 more than the purchase price of the home.  You may have to get an appraisal done to determine the estimated value of the repair.

What are the benefits of borrowing an FHA 203k Loan?

Getting money to repair the property in addition to the purchase price is the main benefit of an FHA 203 loan. Nevertheless, there are also other benefits.

Low down payment

You only have to make a down payment of 3.5% of the purchase price of your property in order to qualify for an FHA 203k loan. However, you will need a minimum credit score of 620. If your credit score is lower than this, you can still get the loan by putting 10% of the purchase price as the down payment. Your debt-to-income ratio has to be between 41 and 45 percent.

One mortgage – one monthly payment

FHA 203k loan is a combination of mortgage and improvement loan. As a result you make only one monthly payment towards your loan. Like in the case of other mortgages, the interest that you pay on a FHA 203k loan is tax deductible.

Low interest rates

When compared to the other types of mortgages, the FHA 203k loan involves decent interest rates. Nevertheless, these rates may vary from one lender to the other. It is always better to short list a few lenders that contact you through FHA live transfer leads and compare their rates before signing the agreement.

FHA 203k loan is assumable

At any point of time if you would like to sell your property, you can transfer your FHA 203k loan to the new buyer. He can continue to make monthly payments at the same interest rate and terms, instead of applying for a new loan.

What are the downsides of borrowing an FHA 203k Loan?

The property has to be the primary residence of the borrower

Not all properties qualify for an FHA 203k loan. There are limits on how much money you can borrow. The loan is off limits for investors.

Licensed contractors need to be used

All improvements on properties bought through FHA 203k loans need to be done by licensed contractors who are carefully screened by the FHA.

Lot of paperwork

There is a lot of paperwork you will have to complete in order to qualify for an FHA 203k loan. This adds to delays in approval.

Mortgage insurance

If you are making a down payment of less than 20 percent, you will have to pay mortgage insurance premium (upfront and monthly) on your FHA 203k loan.

Not all lenders who come to you through FHA leads may be aware of FHA 203k loans. Make sure you do your homework and consult an expert before finding out if this is the best option for you.