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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 construction 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 the 203K FHA construction 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 FHA construction 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 FHA Construction Loan

You can buy a home that needs repairs that you may not have been able to buy. Plus, down payment requirements for FHA construction 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 construction 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 FHA Construction 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.

fha construction loan

What Are FHA Construction Loans?

People who want to buy a home and have average or poor credit often turn to FHA loans. These loans are backed by the Federal Housing Administration, and are available to people who may not be able to qualify for conventional loans.

Most often, for buyers with credit scores under 680, getting a conventional mortgage loan is challenging. Thus FHA loans are a way to buy a home with a low down payment and a competitive interest rate. FHA loans are backed by the US government. Thus if you don't pay the loan, the lender is paid off. This makes these lenders more likely to lend to people with lower credit scores.

But what if you want to buy a home with an FHA loan that needs some work? You are in luck, because the FHA also has a program that allows you to buy a home that needs fixing up. This is called a 203k loan. This type of FHA loan consolidates the price of the house and the renovation costs all into one mortgage.

An FHA 203k loan offers an affordable and practical solution to people who want to fix up their home when they first purchase it. A major benefit to the 203k loan is that you can get a very low interest rate. Another benefit is that you can pay for the renovation costs over the life of the loan, which could be as long as 30 years.

How 203k Loans Work

These construction loans work much like the FHA loan does. The major difference is that the renovation costs that are estimated are put aside into an escrow account. This account is used to release the renovation funds to the contractor as milestones are reached during the renovation process.

This type of loan is a solid choice for people who find a home that is sound structurally, but still needs some work. It also can be used for homes that need to be ripped down and rebuilt.

For instance, if you locate a home that has solid bones in a good location but needs interior and exterior improvements, there is a very good chance you can get an FHA 203k loan on the home. Also, if you locate a home that is a wreck but is on a nice piece of land, you may be able to demo the home for the most part and rebuild it with a rehab or construction loan from FHA.

But where will you live while the home is being fixed up? A rehab loan from FHA can have a fund that has a fund set aside for temporary housing as the repairs are being done. Lenders can put aside adequate funds to pay for your current mortgage or rent for as long as six months. You should remember that these funds are being borrowed, so the amount of the FHA loan will go up.

Keep in mind that you need to have whatever 203k loan renovations done in a six month timeframe. You should ensure that you are using a good contractor who really understands these time constraints.

Types of Repairs You Can Do With 203k Loan

The renovations that can be performed are quite broad. The Department of Housing and Urban Development only states that you do not change the foundation. Other than this, you may do a lot to the home. HUD highlights these as possible renovations that can be performed:

  • Structural changes: You may create a new room, combine two or three rooms
  • Update the kitchen, bathroom or master bedroom, or any room that needs updating
  • Removal of any parts of the house that contain a threat to health, such as mold or asbestos
  • Redoing plumbing. You may replace or fix existing plumbing and may also even add a well or septic system
  • Redo the roof or gutters
  • Redo the floors. You can tear out the current floor and install new tile, wood or laminate
  • Improve landscaping
  • Improve energy conservation by adding solar panels or a more efficient water heater or AC

Good and Bad of FHA Construction or 203k Loans

So far, getting an FHA 203k loan sounds great, right? You can get an older home at a good price and fix it up using funds that are at a low rate and paid for over a long period of time.

But there are some other things to consider:

  • FHA mortgage insurance: You have to pay for mortgage insurance on an FHA loan for at least 11 years. This will add to your monthly payment.
  • Higher rates and closing costs: 203k loans require more work on the lending side. Thus you will either pay a higher rate or will have to pay higher closing costs.
  • Longer closing process: Not every lender knows 203k loans well, so you could take longer to close on the home.
  • Strict rehab timeline: All repairs have to be done within six months, so you have to make sure you are using a good contractor who really knows 203k loans. There is not much room for any cost overruns or delays.

But also, you will enjoy these benefits with a 203k FHA Construction Loan:

  • Low down payment: You will put down as little as 3.5% on your home, which is about the best deal in town in the current mortgage market.
  • Fixed rate: You can get a 30 year loan and have a low fixed rate. And this will include the payment on your 203k loan. So if you are getting $30,000 for repairs on the home, this will add only a small amount to your monthly payment.

The FHA 203k or construction loan is a great deal for the home owner who is buying an older home. You can get the money you need to make repairs and you can make one low, fixed payment on both the mortgage and the FHA construction loan. This really is some of the lowest rates you will ever pay on a construction loan, so an FHA construction loan makes sense for many people.

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