What is an FHA 203K Loan?

What is an FHA 203k Loan?

If you are a home buyer you have many decisions to navigate through. You need to choose a real estate agent, a house, a mortgage lender and what type of loan you want. The entire process can be overwhelming and by the time you get to the mortgage loan  you may be ready to call it quits. Most people think of a 30-year, fixed rate traditional mortgage when they think of buying a house, but that might not be the right one for you. If you are purchasing a fixer upper or want to do some renovations before you move in, an FHA 203k loan may be for you.

What is an FHA 203k Loan?

An FHA 203k loan is a loan through the Federal Housing Administration. It is essentially two loans in one. It covers the cost of purchasing the house, and the estimated cost of making renovations, including materials and labor. There are two types of FHA 203k loans; a streamlined one for those needing $35,000 of non-structural repairs and a regular loan for houses that need more structural type of work. The work is to be completed within six months and need to be completed by licensed contractors.

It can be difficult for home buyers to purchase a home and then receive separate financing to make repairs and renovations, so the FHA provided a solution.

What are the Benefits?

  • You obtain financing for your mortgage and renovations but only have one loan and one closing.
  • In some cases you can also get the loan approved to cover up to 6 months of expenses for an alternate place to live while the work is being completed.
  • The FHA is involved, which makes banks more comfortable. This also means you have a chance of being approved if your credit score leaves a little to be desired.
  • The lender takes into account what the value of the house will be after the work is completed, allowing your loan to get approved when it might not appraise high enough for traditional loan options.

Requirements and How it Works

The approval process is not extremely different than traditional loans. You will need to complete applications and provide proof of income, your credit score, bank statements, and the lender will look at your debt-to-income ratio. However, you will also need to provide a proposal on the work that you will have done along with estimates of the cost. Investors do not qualify for these loans, only homeowners.

Once you have been approved for the loan the renovation funds will be placed into an escrow account. The contractors will be paid out of this account as the work is completed. It is beneficial to work with contractors that are familiar with the process of 203k loans. You will have six months to make sure that all the work is completed.

FHA 203k loans can be a great option for homeowners looking to purchase a fixer upper. However, there are additional fees involved with this type of a loan. Work with a reputable lender and don't be afraid to ask questions to make sure you are getting the loan that is the best fit for you.