Considering Purchasing a Fixer Upper; Understanding FHA 203k Loans
The concept of purchasing a fixer upper and transforming it into your home can be appealing. Customizing every corner to your liking! However the reality can be challenging. Upon realizing the expenses involved in remodeling you may discover that it’s, beyond your budget. Alternatively you might encounter difficulties securing a loan due to the property being deemed “uninhabitable.” This is where an FHA 203k loan comes into play.
An FHA 203k loan is a government backed loan offered to buyers looking to purchase a run down or older property and make repairs. Here’s how it operates; Suppose you’re interested in buying a home that requires a bathroom and kitchen. An FHA 203k lender would provide the funds for acquiring (or refinancing) the property as financing the essential renovations, for the kitchen and bathroom.The loan may also come with a contingency reserve of, up to 20 percent to ensure you have funds for remodel costs and a provision that allows for up to six months of mortgage payments while you live elsewhere during the remodeling process.
Which Repairs are Eligible?
There are two types of FHA 203k mortgage loans. The first is the standard 203k, which is intended for properties needing repairs remodeling, a new garage or landscaping. The second is the limited 203k, which is designed for energy conservation improvements, new roofing, appliances and non structural repairs like painting.
Other repairs covered by an FHA 203k include decks, patios, bathroom and kitchen remodels, flooring, plumbing, siding replacement, home additions like a story, heating and air conditioning systems. However the program does not fund luxury upgrades such, as adding a tennis court or pool to the property.
The coverage does not extend to any enhancements that do not become a part of the property.
How Money Can You Receive?
The maximum amount of money granted by a lender through an FHA 203k loan depends on the loan type (, vs. Streamlined and purchase vs. Refinance).
For a FHA 203k loan the minimum borrowing limit is $5,000.
Under a FHA 203k loan for a purchase the maximum amount offered is determined by comparing two factors;
The Nationwide FHA Mortgage Limits
The suitable Loan to Value (LTV) ratio from the Purchase Loan to Value Limits, multiplied by the lesser of;
- Financeable Repair and Improvement Costs for Standard 203(k) or Limited 203(k)
- Financeable Mortgage Fees for Standard 203(k) or Limited 203(k)
- Financeable Contingency Reserves for Standard 203(k) or Limited 203(k)
- Financeable Mortgage Payment Reserves, for Standard 203(k) only
Refinancing criteria are similar. They also consider the debt amount and associated fees, from the original loan.
With a loan you can secure funding for the homes purchase price along with a $35,000 for repairs without any minimum repair costs and including expenses for energy efficient upgrades. To ascertain the propertys value or its estimated post repair value an appraisal may be necessary. While a 3.5 percent down payment is mandatory it can be sourced from a family member, employer or charitable organization.
What types of properties are eligible?
Properties that qualify for an FHA 203k loan include;
- A one, to four family residence that has been finished for at one year
- A home that has been demolished but retains some of its foundation
- A property you intend to relocate
- The property cannot be a co op but certain condos may meet the eligibility criteria.
Additionally your property must meet FHA requirements. For instance its value should not exceed a maximum determined by your location.
What are the advantages and disadvantages of these loans?
One of the advantages of these loans is that they provide you with the opportunity to purchase a home requiring repairs that you might not have been able to afford. Additionally, the down payment criteria are minimal and you often receive interest rates (please note that interest rates and discount points may differ depending on the 203k lender so it’s crucial to ensure you’re securing a loan deal).
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