An FHA 203k loan is a loan backed by the Federal Government and given to buyers who want to buy a damaged or older home and do repairs on it. Here’s how it works: Let’s say you want to buy a home that needs a brand-new bathroom and kitchen. An FHA 203k lender would then give you the money to buy (or refinance) the house plus the money to do the necessary renovations to the kitchen and bathroom.
The idea of buying a fixer-upper and turning it into your dream home can seem so perfect — every little nook and cranny just to your specifications! The reality, however, can be harsh. When you realize how much it will cost to remodel, you often also realize that you can’t afford it. Or you find out that a lender won’t give you a loan because the home is considered “uninhabitable” as it is. That’s where an FHA 203k loan comes in.
Because an FHA loan is Government-insured, it has less stringent qualifications and credit requirements compared to Conventional financing. The minimum credit score depends on a variety of factors, so be sure to check with your Mortgage Loan Officer about your specific situation.
FHA clients can get financing with a loan-to-value (LTV) ratio of up to 96.5%. This means you’d have the ability to get a new home with as little as 3.5% down which can be paid with 100% gift funds.
Homes that may not normally qualify for financing because of their condition may be eligible if the mortgage is an FHA 203(k) loan. You may be able to get up to 110% of the “as completed” value of the home.
An FHA 203(k) Standard renovation mortgage allows buyers to finance major or minor upgrades on a home using the future value of the home, all without having to complete the work before the actual closing date. It allows for major structural changes as well as landscaping, new appliances and more on primary residences.
An FHA 203(k) Limited, formerly Streamline 203(k), is designed specifically for homes that may need some cosmetic repairs or upgrades, the FHA Limited is intended for primary residences that can be remodeled, repaired, or updated for less than $35,000.
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The FHA 203k is a sister product to the FHA loan. While the FHA loan is used to purchase or refinance a home, the 203k loan is used to buy an existing property and also make repairs, improvements or remodeling to the home. This loan basically allows the home buyer to borrow more money than the asking price and use the extra funds for the work on the home.Get Started Now
Borrowers who are interested in an FHA Purchase Loan must be able to make a down-payment of at least 3.5% (which can be a gift), must live in the property they are purchasing and have a debt-to-income ratio no higher than 50-55% (depending on their credit history).
FHA borrowers can use their savings, a financial gift from a family member or a government grant for down-payment assistance. states, Cities, counties, local housing authorities, and nonprofits are all potential sources for down-payment help. In our local area of Delaware County, there are a handful of DAPs (Down Payment Assistance) programs that are available. The National Council of State Housing Agencies is a good resource for assistance programs too.
There are two main types of FHA 203k mortgage loans. The first is the regular or standard 203k, which is given for properties that need things like core structural repairs, remodeling, a new garage, or landscaping; the second is the streamlined or limited 203k, which is given for energy efficiency /conservation improvements, new roofing, new appliances, or non-structural repairs such as finishing and painting.
Here are a few common repairs that an FHA 203k loan will cover:
The program will not cover so-called “luxury” improvements such as adding a tennis court or pool to the property. It also does not cover any improvement that does not become a permanent part of the property.
HUD limits how much FHA lenders can charge in closing costs to no more than 3 percent to 5 percent of the loan amount. The total for closing costs will vary based on the state you live in, the size of your loan and whether you pay points to lower the interest rate.
The FHA allows home sellers, builders and lenders to pay some of the borrower’s closing costs, such as for an appraisal, credit report or title expenses. For example, a builder might offer to pay closing costs as an incentive for the borrower to buy a new home. The great thing about an FHA loan, is that the seller/builder/lender can offer up to 6% in credits to offset closing costs and prepaids; Conventional financing is limited to 3%.
FHA borrowers generally need to have good credit, although borrowers who have blemishes earlier in their credit history may also be eligible if they have demonstrated financial responsibility in recent years even with scores “as low as 500” with 10 percent down.
To get FHA’s maximum financing of 97.5%, you need a credit score of 580 or higher.
Mortgage insurance is generally required when borrowers put down less than 20 percent. It insures the mortgage for the lender in case the borrower defaults. All FHA loans require the borrower to pay two mortgage insurance premiums:
Upfront mortgage insurance premium: 1.75 percent of the loan amount, paid when the borrower gets the loan. The premium can be incorporated into the loan amount. Also, if a borrower chooses not to have the higher loan amount, the premium can be paid at closing where a seller credit can be applied against the full amount.
Annual mortgage insurance premium: 0.45 percent to 1.05 percent, depending on the loan term (15 years vs. 30 years), the loan amount and the initial loan-to-value ratio, or Loan-to-Value. This premium amount is divided by 12 and paid monthly.
FHA Streamline Refinance: The FHA Streamline Refinance is a special mortgage product reserved for borrowers with existing FHA loans.*The program allows homeowners to bypass many of the traditional underwriting requirements. This means that there is far less required documentation and you don’t have to go through the process of another appraisal.
FHA Cash-Out Refinance: The FHA’s Cash-Out Refinance Loan is for homeowners who want to take cash out of their home equity to pay off debt, fund school tuition, making home improvements or any other purpose.
Owner/occupants and nonprofit organizations can use FHA 203k, but not investors. The program is designed for one to four unit properties, but condo and townhome owners can use the program for interior projects. You don’t need perfect credit – because the FHA protects lenders in case you default, it’s easier to qualify. You still need sufficient income to cover the payments.
The interest rate will vary, depending on rates in general and your credit. Expect to pay a rate that’s 1 percent or so higher than you’d pay on a standard loan. Think of this as the cost of easier approval (or bundling both your purchase and improvement loans into one). Plus, lenders need to do extra work tracking the progress of your project and handling payouts. At the same time, the loan is insured by the FHA, so lenders might offer a lower rate than you’d get elsewhere.
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