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203k Home Loans Explained: What Every Home Buyer Needs to Know

Posted by M Z on Wednesday, August 23rd, 2017 at 10:03am.

What to Know About the 203k Home LoanBuying a perfect house is a wonderful goal, but in the reality of today's very competitive real estate market, it may not be a very practical one. In many areas of the country, the best listings are often under contract within days or even hours of being listed, making it difficult for buyers to find and succeed in buying the home of their dreams. Buyers who want to avoid competing for too few good homes may want to consider taking a new route to find their dream home by using an FHA 203k mortgage to purchase a home that can be renovated to fit their housing needs and desires.

Using an FHA 203k Home Loan Opens Up Additional Buying Opportunities

Many of the most commonly used home mortgages, such as FHA, VA, USDA Rural Development and many conventional loans, require that the home being purchased meet certain condition and appraisal guidelines at the time of purchase. This means that homes that have repair or renovation issues are usually unacceptable for these financing options.

With an FHA 203k loan, however, buyers can successfully purchase and renovate many of these distressed homes. Since this mortgage option is specifically designed to cover both the purchase price and the expected costs of renovations and improvements, buyers are able to enjoy a much broader selection of available homes—it could be a way to get a great home in a popular area like the Clinton Township. This type of loan option also benefits the community and tax base of the area in which the buyer is located because it allows buyers to include foreclosed or abandoned properties in their home search that might otherwise remain vacant and unsold due to condition issues.

In some cases, the FHA 203k can even include the cost of temporary housing to help buyers avoid having to move into a home while repairs and renovations are in progress. Buyers can also use the FHA 203k home loan to purchase an unsuitable home, remove it down to the foundation and then rebuild, as long as certain restrictions are met.

Understanding How an FHA 203k Home Loan is Structured

Buyers who are interested in using the FHA 203k home loan option will need a solid renovation plan that can be accomplished within six months of the date they close on the purchase of the home. The funds to pay for the actual renovation are held in escrow, so that each contractor can be paid as they complete their work on the home. Because of this, buyers using an FHA 203k loan must be careful to choose contractors who are capable of completing their work within this timeline.

Eligibility Renovations and Improvements Under the FHA 203k Home Loan

Available through approved lenders and insured through the Federal Housing Administration (FHA), the 203k loan can be used to purchase homes that need more than $5,000 worth of renovations or repairs. Upper loan limits for the use of this loan are limited by existing local FHA mortgage limits for the area in which the home is located. Actual valuations are determined by either the actual value of the unrenovated property plus the cost of the rehab or 110 percent of the appraised value after the rehabilitation is complete.

Eligible improvements under an FHA 203k loan include:

  • Making structural alterations, improvements, and repairs
  • Updating and modernizing the home to cure functional obsolescence
  • Eliminating health and safety issues
  • Improving the appearance
  • Replacing or reconditioning basic systems and components of the home, including private water wells, septic systems, plumbing, electrical, roofing, flooring and guttering
  • Making major site and landscape improvements
  • Enhancing mobility and accessibility for disabled owners
  • Increasing the energy efficiency of the home

Homes that only require less intensive cosmetic updating or minor improvements of at least $5,000 can opt to use the Streamlined FHA 203k home loan, which offers a simpler loan process than larger renovation projects.

Critical Points Buyers Should Know When Considering the Use of an FHA 203k Home Loan

While the FHA 203k home loan can be an excellent option to help prospective home buyers succeed in finding a home that will fit their needs and offer comfort and value, there are some points that prospective applicants should be aware of before filling out a loan application. These include:

  • A requirement that all improvements are performed only by licensed contractors
  • Strict documentation requirements and timelines
  • The payment of an upfront mortgage insurance premium (MIP) and a possible supplemental origination fee, depending on lender policy
  • A requirement that improvements will meet all current building codes and eliminate any existing health and safety issues

To learn more about using an FHA 203k loan in your area or to find home listings that are suitable for this loan type, prospective buyers can discuss their housing needs with their real estate professional.

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