11/23/2022
The alternatives for buying a new or used home in the U.S. housing market are many. If you need to repair your home and you cannot find a bank to lend you the money, you can opt for an FHA 203K mortgage loan.
This also serves to finance a home that needs rehabilitation, so read on and find out how it works.
What is a 203k loan?
A 203k loan is a type of mortgage sponsored by the Federal Housing Administration (FHA).
You can use it in 3 specific situations: to rehab or renovate your property, when you want to refinance or to acquire a home that requires some major fixer-upper to make it habitable.
This type of financing covers both the cost of the property and the amount of money needed to make the repairs. For this reason, the estimated funds for these renovations go into an escrow account.
As you meet the deadlines, you can withdraw the money for the construction equipment you have hired.
Eligible homes for these types of mortgages
You need to know that 203k loans cannot be used to finance investment property. Properties eligible for this resource are:
- Single-family homes.
- Condos.
- 2, 3 and 4 bedroom homes.
- Mixed-use properties with little commercial use.
- Properties that you want to move from one place to another.
- Manufactured homes built after 1978.
- Homes that have been demolished but retain their foundations.
Otherwise, the property must be at least 1 year old. If you are going to use a 203k limited, it must meet safety and health requirements.
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These loans require you to live in the property until the renovations are completed. If you plan to buy a rental or income-producing property, you will have to buy a multifamily property and live in one of those units.
What rehabs can you make with 203k loans?
203k FHA loans can help you pay for a variety of expenses related to renovations, rehabilitation or remodeling. While you can't finance a swimming pool, hot tub, outdoor fire pits or satellite installation, you can finance:
- Accessibility improvements.
- Structural changes and additions.
- Major landscaping repairs.
- Aesthetic repairs and cosmetic changes.
- Purchase of energy efficiency solutions.
- Plumbing or electrical upgrades.
- Appliance replacement or system upgrades.
- Payment for materials and labor related to approved renovations.
- Obtaining 6 months' rent or temporary residency payment.
- Compliance with local ordinances or codes required by law.
Types of FHA 203k Loans
In reference to financing options for 203k loans, you have 2 alternatives: Standard and Limited (formerly known as Streamline). While the former focuses on larger renewals, the latter has less paperwork and equity. We can summarize both formats as follows:
- Standard Version. Ideal for larger projects, it includes a more complicated process and you must hire a HUD consultant to help you. The minimum you can apply for is $5,000 and the maximum is 110% of what the property would be worth after settlement (as long as it is below the state limit). You can choose a fixed-rate or adjustable-raterate and term to suit your needs.
- Limited Version. Indicated for small repairs, the maximum you can get is $35,000. These credits cannot be used for new construction, structural repairs or remodeling that requires relocating a load-bearing wall.
For costs under $15,000, no inspections are required, you must live in the property during rehabilitation and move in within 60 days of closing. You can also choose a fixed or variable rate plan.
Pros and cons of a 203k loan
All financing has its details that you should know well to make the best decision for your personal finances. As for FHA 203k mortgage loans, let's mention the good first:
- It can be used to refinance.
- It offers you an interest rate of 3.5%.
- You have fixed or adjustable rate options.
- You can finance the purchase and rehabilitation of a home with a single loan.
- It is possible to find lower prices for properties and less competition.
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Among the less favorable, it seems important to us to highlight:
- It requires a professional appraisal.
- Requires a lot of paperwork (Standard).
- Not all lenders or banks offer it.
- Includes some additional origination fees.
- May require a down payment and annual mortgage insurance.
- May have higher interest rates than other FHA programs.
- Cannot be used for investment properties unless you decide to live in one.
Español: Qué son los préstamos hipotecarios FHA 203K