The FHA 203(k) loan is one of the most common mortgage loan types due to its amazing features and benefits. The comprehensiveness of the home loan, which allows users to utilize one loan for both home improvement and home purchase, is one of such features.
203k loans are insured by the FHA, meaning that lending institutions take less risk, making it easier for borrowers to get approved with a lower interest rate.
FHA 203k Basics
There are some properties which are close to perfect regarding their location and the potential of such property. However, these properties require some improvements, without which they might not be suitable for living.
FHA 203k ensures that owners of such properties can turn them into homes, getting them off the market and making the properties valuable again.
Fund repairs and purchase: FHA 203k allows you to borrow enough money to purchase a home and make the necessary repairs required to make the house suitable for living. Due to the FHA’s involvement, lenders are encouraged to move forward with such a property.
Temporary housing: The loan also allows borrowers to arrange temporary housing, pending the time while construction is completed. Borrowers can take an extra credit to cover rent or an existing mortgage for up to six months.
Project overview: One of the requirements is for the project to be completed within six months. Funds are usually put in an escrow account and paid out upon the completion of each milestone.
It is advised that you work with a reputable contractor that is familiar with the 203k process.
Eligibility: Owners, occupants, and nonprofit organizations are eligible for the FHA 203k loan. However, investors are exempted from this type of loan. The loan program is mainly designed for one-to-four unit properties. However, owners of condo and townhome can use the program for interior projects.
The minimum amount that can be borrowed is $5,000, with the maximum limits set by the FHA depending on the location of the property. Most people buying a single-family home will fall within these limits, with the Limited FHA 203k allowing borrowers to borrow less with a more straightforward process for smaller projects.
Interest rate: The interest rate varies, depending on the rates in general and the borrower’s credit. However, lending institutions tend to offer a lower interest rate than you would ordinarily get from other sources.
It is also worth noting that rates of 203k loans can be either fixed-rate or variable rate with repayment of up to 30 years.
Down payment: Like other loans insured by the FHA, the 203k loan allows borrowers to pay as little as 3.5 percent up front.
Contractors and DIY
Section 203k loans allow users to make significant improvements on their home without having to break the bank. It will enable borrowers to do the things that matter most to them; it also allows them to use green or energy-efficient appliances and materials.
While the purchase of luxury items cannot be funded using 203k, homeowners can make significant improvements to their properties.
One of the significant drawbacks, which can also be an excellent side to 203k, is that borrowers are not allowed to do the work themselves, even if they are skilled, licensed contractors. It is mandatory to use licensed contractors for all tasks, while also making it known to the contractors that 203k is being used.
Benefits and Drawbacks
FHA 203k loans are great for the improvement of properties. However, it is worth noting that there is a prize to pay for these benefits.
Cost: 203k loans might not necessarily be the most affordable option. This is so as borrowers need to pay an up-front mortgage insurance premium (MIP) and a small ongoing fee for each monthly payment.
Paperwork: The paperwork involved in 203k loans can be sometimes annoying, with numerous forms to fill out, with contractors subject to some of this pain.
Time: Expectedly, getting 203k loans is time-consuming due to the numerous paperwork involved. In addition to the time required in dealing with paperwork, borrowers need to wait for answers from the lending institution.
Required standards: Due to the standards required by the FHA, there are specific improvements that cannot be funded with 203k loans.
For details about the section 203k loan program, contact your nearest FHA Loan Specialist to get started.