A Comprehensive Guide to FHA 203k Loans

A Comprehensive Guide to FHA 203k Loans

Keep in mind that your down payment will be a percentage of the total loan amount, including your repair costs. So if your home costs $200,000 and your repair costs are $40,000 ($240,000 total), you’d need at least $8,400 (3.5%) to qualify for a 203k loan.

Refinancing with a 203k loan

If you already own a home and want to repair, remodel, or renovate it, refinancing with a 203k loan might be a smart move. A nice benefit is that you can get a higher loan-to-value ratio (LTV) with a refinance than on a purchase loan.

The FHA allows for a 96.5% LTV on 203k purchase loans, but on 203k refinances, the LTV can go up to 97.5% — offering even more funding for renovations and improvements. 

Here’s what else you should know about 203k refinancing:

  • You can use a 203k refinance even if you don’t have an FHA loan.
  • You don’t need to be in the home for a full year, as required for a purchase loan.
  • All other 203k rules and eligibility requirements apply.

With a 203k refinance, you can stay in your home and complete your renovations after closing on the loan.

Pros and cons of 203k loans

On the upside, 203k loans allow you to buy low-cost, low-competition properties you might not have otherwise considered. You can also customize the property to your exact needs, and once your repairs are done, you’ll enjoy instant equity in the home.

Another big advantage is that you can deduct the interest you pay to complete your renovations. Since interest on other financing products like personal loans and credit cards isn’t deductible, this can offer significant savings. 

There are downsides, of course. For one, 203k loans require mortgage insurance. That means an extra upfront fee and higher monthly costs for the life of the loan. They also have higher interest rates than traditional FHA mortgages. And, because they come with more red tape and paperwork (both for you and the lender), they also require a supplementary origination fee at closing.

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In addition to this, 203k loans aren’t for use on investment properties. Unless you plan to live in one unit of a multi-unit building, renting out your 203k property just isn’t an option.

Finally, 203k loans typically take longer to close than other mortgages — sometimes two to three times as long. This is due to contractor, appraisal, and approval requirements. This can be frustrating to sellers looking to close and move on quickly.

Advantages of 203k loans

  • You can finance both your home purchase and its renovations with a single loan.
  • They offer low down payments compared to other loan options (as little as 3.5%).
  • They can be used to refinance.
  • You may see lower home prices and less homebuying competition.
  • They’re available with fixed or adjustable interest rates.

Disadvantages of 203k loans

  • They require upfront and annual mortgage insurance.
  • They might have higher interest rates than typical FHA loans.
  • They require lots of paperwork.
  • They take longer to process and close.
  • They come with additional origination fees.
  • They may require an appraisal.
  • They can’t be used on investment properties (unless you plan to live there).
  • They’re only offered by certain lenders.

How to get an FHA 203k loan

If you’re considering a 203k loan for your home purchase or renovation project, the first step is to find a lender. Not all FHA-approved lenders offer 203k loans, so you’ll need to inquire specifically about the 203k before going any further. 

You should also contact several 203k lenders and get quotes from each. This will ensure you get the best possible rates and deals. Once you do this, take the following steps:

  1. Find the right property. Make sure the seller knows you’re using a 203k loan from the outset, as they can take longer than traditional mortgages to close.
  2. Fill out your lender’s application. You’ll need to provide financial documentation as well as information regarding your repairs during this process.
  3. Get a HUD-approved 203k consultant. This is required if you’ll be using a Standard 203k.
  4. Get quotes from licensed contractors. They’ll also need to complete some 203k-related paperwork.
  5. Wait for the lender to appraise your home and underwrite your loan. They’ll move your renovation funds into an escrow account after closing.
  6. Schedule your contractors. They’ll be paid by your HUD consultant or at the beginning and end of your project (depending on which 203k program you’ve chosen.)
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If you’re using a Standard 203k, you’ll also have an inspection once the improvements are complete. This will be coordinated by your HUD consultant. 

203k FAQ

What sort of interest rates can I expect on a 203k loan?

You’ll typically see a slightly higher rate on 203k loans than on other mortgages because of the extra work and paperwork required.

Because these loans are insured by the FHA, though, your rates might still be lower than other renovation financing options like home equity lines of credit (HELOCs), home equity loans, and personal loans. Be sure to compare quotes across products and lenders to get the best possible deal.

Do 203k loans require mortgage insurance?

All FHA loans, including 203k loans, require mortgage insurance. You’ll pay a 1.75% premium up front on closing day, plus an annual premium. The annual premium depends on your loan balance and is spread across your monthly payments. 

How do I find an approved 203k consultant?

You can use the Department of Housing and Urban Development’s online search tool. Just enter your city and state to see a list of HUD-approved 203k consultants.

How much can I qualify for?

To see your maximum 203k loan amount, use HUD’s online 203k calculator. 

Can I do any of the work myself?

If you’re a licensed contractor or have other significant experience in construction, you may be able to — but you’ll have to prove your know-how to the lender. In most cases, lenders prefer that you use an outside, licensed contractor for any 203k repairs. This reduces risk and ensures your property is up to FHA standards.

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How do I find contractors?

You can use any contractor in your area as long as they’re state-licensed, bonded, and insured. For your own benefit, it’s smart to make sure they have 203k experience, as these loans have very specific procedural and documentation requirements. 

Where can I get an FHA 203k loan?

You’ll have to use an FHA-approved lender. Not all of them offer 203k loans, though, so check out their websites or contact a loan officer to be sure. You can also use HUD’s lender tool (be sure to check the 203k box) to find one who’s completed at least one 203k project in the last year.

If I don’t use an FHA 203k loan, what other options do I have to finance my home improvements?

There are lots of options. If you’re a homeowner, a home equity loan, HELOC, or cash-out refinance could work. If you’re purchasing a new property, a Fannie Mae HomeStyle Loan is a good choice. You can also use a personal loan or a credit card.

A 203k loan is worth the time it takes

If you’ve got your eye on a fixer-upper or just need to make some repairs to your existing home, a 203k loan can be a smart option. 

Just make sure you understand the red tape that comes with it, and exercise patience as you go about the application process. This type of mortgage will likely take much longer than previous ones you’ve applied for (but it should be worth the wait).