203k Home Loans might seem a bit intimidating, but once you understand what is involved and how they work, you just might see how it can be a good option.

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In this blog I will be going over the Purpose of a 203k loan, the two 203k Loan Types, the Assistance you can receive, Requirements you must fulfill to receive a 203k loan, the different Mortgage Insurance Premiums you can fall within, as well as the Allowed Improvements that can be made through the loan.

Since this loan is so specific, and well outlined it makes the process of deciding whether or not it will suit your needs fairly simple.

Lets start with a Summary of a 203k Rehab Mortgage Insurance:

A 203k Loan through a single mortgage payment allows potential homebuyers to finance the purchase and costs to repair or renovate a home. A 203k Loan also allows current homeowners to either refinance and rehabilitate a home with that single mortgage payment or to finance the costs of renovated  of their existing home.

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The Purpose:

To make acquiring a loan for the purchase of a home that needs to be refurbished, renovated, or repaired more affordable with a smaller down-payment, money available to pay for the work being done, while being rolled into one monthly mortgage payment. 203k loans are a single, long-term, fixed or adjustable loan that are also insured; this protects the lender and helps the borrowers save time and money.

Assistance

Insures mortgage loans for the purchase or refinance of a home to be rehabilitated. A portion of the loan proceeds for a refinance pay off the current mortgage, for a home purchase pay out to the seller, the remaining amount in both situations are placed into an escrow account, they funds are released to pay contractors as work is being completed. Rehab costs must be a minimum of $5,000, however total property value cannot exceed the FHA mortgage limit for the area (property value determined by a: value of property before rehab plus cost of work or b: 110% of the appraised value after rehab, which ever is the lesser amount).

Requirements: 

  • Home buyer/owner
    • Minimum credit score of 640
    • Available to first time home buyers
    • For homeowners/buyers, not for investors
    • Low down payment of at least 3.5% (can put down more if able)
    • Property must be principal residence
    • Lender must be FHA approved
    • Proof of income
    • Solid employment history
    • No late payments for 1 year
    • No foreclosures or bankruptcies in 36 months
    • 2 years of tax returns
  • Property
    • Single family
    • Homes older than 1 year
    • 1-4 unit condos (interior only)
    • 1-4 unit Townhouse/ detached home
    • Houses/modular units offsite to be transported
    • Conversions of single units into 2-4 units
    • Tear down where at least a portion of original foundation remains

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203k Loan Types:

  • Limited 203k Loan: Allows home buyers or current homeowners(refinance) to borrow up to $35,000 from the mortgage to pay for repairs, upgrades or other renovations.
  • Standard 203k Loan: Allows home buyers to to make major renovations with no cash limit on borrowing, the home cannot be occupied during renovations, up to 6 months or mortgage payments can be added to the loan, and a HUD consultant will need to oversee work being done when needed.

Allowed Improvements

The types of repairs allowed for a Limited 203k Loan are:

  • Repair/replace roofs, gutters and down spouts
  • Repair/replace existing HVAC systems
  • Lead hazards
  • Painting
  • Appliances
  • Flooring
  • Weatherization
  • Basement waterproofing
  • Repair/replace/add decks, patios, porches
  • Windows, doors, and siding
  • Septic/well repair/replace
  • Improvements for accessibility

The types of repairs allowed for a Standard 203k Loan are:

  • Major rehab (relocation of load-bearing wall)
  • New construction (additions)
  • Structural repair
  • Landscaping/ site amenity
  • Repairs requiring use of architectural drawings
  • Work scheduled longer than 3 months
  • Work that requires more than 2 payments to the contractor
  • Improvements that require a plan viewer
  • Improvements that result in work not starting within 30 days after loan closing or:
  • Improvements that result in the owner to be displaced for more than 30 days during the rehab

Mortgage Insurance Premiums:

To make things easier I have included the chart below to help you figure out what rate you will fall within.

If you are thinking of buying a home look into a 203k loan. With a low down payment, and a minimum of $5,000 needing to be spent for repairs it could be a good option for someone just starting out. Also if you have the time to spend for a complete renovation, you could turn a “fixer-upper” into a dream home.

For more information you can visit the HUD 203k page. Or you can speak with a qualified FHA lender from the list here.