The FHA 203K loan is a type of financing that is insured by the Federal Housing Administration. It is a unique type of financing that allows homeowners to obtain both a purchase loan and rehabilitation financing in the same transaction. Prior to this landmark loan program, a homeowner had to obtain a temporary down payment loan to purchase the home and a separate rehabilitation home loan to make necessary repairs. Only after the repairs were completed was the homeowner able to obtain permanent financing for his newly improved home.
FHA 203K: How does it work?
The FHA 203K loan was designed to expedite the process of buying a home that needs repairs. In order to provide funds for repairs, the loan amount is based on an expected future appraisal value that takes into account how much value completed repairs will add to current value. Up to $35,000 of the purchase price of the home can be financed in the loan to cover the cost of repairs.
Contractors chosen by the borrower to perform the repairs will receive money for their work in two drawings. A lottery is for 50% of the work and is disbursed at the start of the repairs, while the remaining 50% will be disbursed after the work is complete. Repairs must begin within thirty days of loan closing and must be completed within six months. The amount paid to contractors should be determined before the loan closes by obtaining written bids on material and labor costs. The owner can do the work himself as long as he is a licensed and certified contractor.
What types of repairs will the FHA 203K cover?
Some of the repairs eligible to be completed with FHA 203k loan funds include: roof replacement, electrical or plumbing work, kitchen remodeling, accessibility renovations, appliance purchases, and painting. Although many cosmetic renovations are allowed, no luxury items or upgrades are allowed. Also, funds needed to repair any detached structures, such as sheds, pools, and gazebos, may not be included in the amount of this loan.
FHA 203K: Qualifications
The FHA 203K program has the same types of eligibility requirements that exist with any FHA home loan. A homeowner must qualify based on credit and income to be eligible and the property must be FHA approved. As a general rule, the monthly mortgage payment cannot exceed 41% of the borrower’s monthly income and most lenders require at least a credit score of 620. Qualifying homes include: FHA-approved condominiums, 1-bedroom homes to 4 units and Planned Urban Development (PUD) housing. Construction of the home must have been completed at least one year prior to financing for the home to qualify.
The FHA 203K program can be a great tool for any homeowner looking to renovate or repair their home. In a housing market that has seen foreclosures reach record levels, the FHA 203k loan can not only give prospective homeowners more opportunities to purchase a home, but can also help rebuild the housing market by making it easier to rehabilitate foreclosed properties. .
