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7 Things You Should Know About the FHA 203K Loan Program

by June Bloom

For potential homeowners who want a home rehab loan insured by the Federal Housing Administration to take advantage of the low down payment of 3.5% and flexible credit criteria, there are other benefits in store! When you get an FHA loan, you also have the option of borrowing money to fix up the home, in many cases. These are also known as 203k loans which are popular home rehabilitation loans for construction, repairs and more. The 203K loan is a unique mortgage program that helps borrowers finance home remodeling while enabling people to exceed the value of their property. Below are seven things that you should know about FHA's 203K loan program:

#1 FHA 203k Is Backed by Uncle Sam

Just like the FHA loan that you are getting, the 203k loan also is backed by the US government. So what does that mean exactly? If you lose your job and cannot make your FHA loan or 203k payments anymore, the government will pay off the lender. By guaranteeing the loan, you are much more likely to get a home loan with a low down payment. This also incentivizes lenders to offer more flexible credit terms with low interest rates. It is simply amazing that the Federal Housing Administration encourages applicants to consider approving 203K loans for bad credit.

What this means for your 203k loan is that you will rarely see a home improvement loan with a lower rate and monthly payment. So if you want to get an older home that needs a new kitchen and bathroom, you may be able to pay for much of it with the 203k loan. Your loan payment for that type of repair on a regular loan would be a lot higher than with a 203k loan. The reported 203k loan rates remain competitive with other pricing advertised by FHA lenders. We strongly suggest that you check your eligibility and today's FHA rates now while the program is available. When shopping for rehab loan solutions it makes sense to verify if you are getting quotes from 203k lenders that are approved to offer such unique products.

#2 Repairs that Qualify

There are two major types of 203k loans. One is known as the standard 203. This home improvement loan will give you money for remodeling, a new garage, or landscaping. The other type is a streamlined 203k. This will provide you with funds for energy improvements, new appliances, a new roof, or non-structure related repairs including paint. Some of the other repairs that your FHA 203k loan will cover include:

  • Patio
  • Deck
  • Heating and AC
  • New siding
  • Plumbing
  • Flooring
  • Bathroom remodel
  • Kitchen remodel

Keep in mind that this type of home loan will not cover luxury upgrades, such as a tennis court or pool.

#3 Amount of Money You Can Get

The maximum amount you can obtain will depend upon which type of loan you are getting. The minimum amount you can get with a regular 203k loan is $5000. With the same type of loan, the maximum you can get is the maximum FHA mortgage limit for your area. With a streamlined loan, you can get an FHA loan for the price of the house plus up to $35,000. Yes when it makes sense, FHA approves the 203K loan with bad credit.

203k loans

#4 the Types of Homes That Are Eligible

Homes that qualify for an FHA 203k loan are:

  • 1-4 unit family home that has been built for at least a year
  • A home that was taken down, as long as some of the foundation is there
  • A home that you want to move
  • The home may not be a co-op but some condos may qualify

The property must also qualify per FHA requirements. This means that the home must not go over FHA's maximum amount for your area.

#5 Benefits of the 203k Loan

You can buy a home that needs repairs that you may not have been able to buy. Plus, down payment requirements for FHA loans are very reasonable and you can get a good interest rate. Also, you will rarely be able to borrow money for repairs as cheap as with an FHA loan. How many home remodeling loans actually approve borrowers with money even though they have no equity in their property? The 203K loan is a one of a kind opportunity for new home buyers and homeowners looking for financing to upgrade their primary residence. I can't think of any other no equity program like the bad credit 203k loan program.

#6 Drawbacks of the 203k Loan

Not every property is going to qualify for this program. Also, there are maximum limits on the funds you can get and getting the loan is not easy. For instance, to get the loan, you might have to bring in a consultant to show what exactly you want to do with the money. With this home improvement loan, you can't randomly spend the money for debt consolidation, vacations or investment opportunities, rather you must document the funds on house repairs or rehabilitation efforts that were approved by the underwriter.

#7 580 Minimum FICO Score

You do not have to have a specific credit score to be approved for this program, but a 580 FICO often is enforced by many lenders. If you have a credit score below that, you still may qualify but FHA may require you to put 10% down. Getting a 203k loan on an older home through FHA can be a great way to make needed repairs. If you were to borrow the money from a bank or another lender, you would pay a much higher interest rate. What other home improvement loan allows you to have low credit scores and no equity?

While there are limits to what you can borrow and what it can be used for, millions of people take advantage of the 203k loan program each year. You will want to make sure that your home can qualify for this program. Also, you will still need to qualify financially and show that you have the documented income to pay the loan back.

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