These loans are an excellent option for buying a fixer-upper.
An FHA 203k rehab loan lets you purchase a house that needs work and roll the renovation costs into one mortgage. You get a final loan that will cover the purchase price plus the cost of any upgrades required.
The FHA 203k is insured by the Federal Housing Administration, which has more lenient mortgage qualifications than other renovation loan products.
How Does an FHA 203k Rehab Loan Work?
There are two types of 203k FHA loans. One is called the limited, AKA a streamline, and the other is the standard.
Each of these 203k loan types has rules about how much you will be able to borrow for your renovation project. The FHA 203k limited loan allows you to borrow up to $35,000 for your renovations. Under this program, the money cannot be used for significant structural issues.
The FHA 203k Standard loan is used when you have significant repairs, including those considered structural in nature. However, when using the 203k standard mortgage, the renovations must cost at least $5000.
When utilizing the 203k standard loan, you must hire a HUD consultant to help with the home improvement process.
Some of the more common repairs and improvements that FHA 203k loans can be used for include making improvements to the plumbing or electrical systems, fixing unpermitted work, eliminating any safety hazards, changing flooring, painting, adding lighting, replacing the roof, and making the home accessible for the disabled.
These are just a few examples. There can be many other uses for an FHA 203k mortgage.
Lenders will require you to use qualified licensed contractors to complete any work. It becomes essential to hire contractors you know and trust as there will be deadlines to complete the renovations. All renovations when using a 203k loan must be done within six months.
Who Can Get an FHA 203k Loan?
To use FHA 203k financing, you must have a credit score of at least 500. The credit score requirements come directly from FHA. However, most individual lenders will typically require a higher score.
You can plan on most lenders wanting a credit score of at least 580, and some lenders might be even higher. If your score is higher than 580, FHA will allow you to have a 3.5% down payment.
When your score is between 500-and 579, the FHA will require you to have ten percent to put down. With this loan program, it is possible to get down payment assistance in a monetary gift from family and friends.
Loan Limits for FHA 203k Loans
For the year 2022, the FHA loan limits have been increased. They have been moved up to $420,860 in low-cost areas and $970,800 in high-cost areas. The loan limits have been moved up due to the increased housing appreciation across the country.
How to Apply For an FHA 203k?
To get an FHA 203k rehab loan, you'll need to find a lender specializing in these mortgages types. Not every lender does 203k loans.
The lender will verify your income, debts, and credit scores like other mortgages.
What Are The Pros and Cons of an FHA 203k Mortgage?
If you're planning on buying a home that needs renovations, a 203k loan can be an excellent option.
Some of the significant advantages of an FHA 203k are relaxed credit requirements, covers the cost of renovations while occupying the property, and offers a much lower cost than financing using credit cards.
Some of the cons of this kind of loan include requiring FHA mortgage insurance, it cannot be used to buy an investment property, and requires consultants and certified contractors to be used for the project.
Unfortunately, if you're interested in flipping houses, you will not be able to use this type of home renovation loan.
A 203k rehab loan is an excellent loan product when you want to buy a home that needs an overhaul and get one loan to fix it. Other types of home improvement loans can be used, such as the HomeStyle loan, guaranteed by Fannie Mae, and The CHOICERenovation loan, secured by Freddie Mac.
Speaking with a local mortgage broker is wise to determine which renovation loan is best for your circumstances. Make sure you shop the loan with multiple lenders. Like other mortgages, you may find one lender has a better deal than another.
The FHA 203k is often one of the most popular choices for the reasons discussed.
The requirements for using an FHA 203k loan are certainly not overbearing. It is a significant reason why this loan is so popular among those who want to renovate a property.
About the author: The above article on the requirements for using an FHA 203k loan was written by Bill Gassett. Bill has expertise in several housing topics, including mortgages, financing, home improvements, moving, and general real estate. He has written for numerous well-known mortgage and real estate publications.