FHA 203k: Loans for Home Improvement

FHA 203k: Loans for Home Improvement

With the ever-growing popularity of home-improvement channels, many home buyers are now setting their sights on properties in need of renovation. This could make sense for someone who likes the type of work such a project will bring, or someone who’s found the perfect home despite its poor condition. The pool of potential buyers could also shrink as the vast majority simply want a home to be completely finished upon purchase.

Some fixer-uppers need more work than others. In order to restore such properties, many buyers will need to secure a loan for their remodeling purposes. All of this work can be very costly, even for a restoration back to average condition. This is where an FHA 203k loan could make sense.

An FHA 203k loan, also known sometimes as a construction loan, is a program from the federal government through the Federal Housing Administration (FHA) that is designed for those who want to repair or rehab a home as their primary residence. It allows a borrower to finance both the house and the repairs.

203k Loan Options

The Streamlined option sets a maximum of $35,000 for repairs to the home. There is no minimum. Repairs must begin within 30 days and be completed in six months. Also, eligible costs for repairs are restricted to “non-luxury” items.

The Standard or Regular option is for bigger repairs and carries a minimum of $5,000 for allowable repairs. Borrowers can do almost any repairs or upgrades provided value is added to the home when finished.

The loan amount is up to 110 percent of the property’s proposed future value, or the home price plus repair costs, whichever is less.

Who Can Qualify?

Many buyers are unable to cover the entire cost of a home, even one that’s in poor quality. However, those more enterprising buyers can see the benefits in restoring a property. Instant equity can be a great tool that is added back into the home with even the smallest of repairs.

The loans are available to those who will be living in the home, once finished. The program is not available to investors. Just like any other loan, the borrower will have to meet the standards of the lenders and FHA. This typically includes a credit score no less than 620, and 640 to some lenders, maximum debt-to-equity ratio of between 41% – 45%, and a 3.5% down payment.

Drawbacks for these loans include a longer closing time than regular FHA loans. Borrowers can also expect to pay a higher interest rate due to the nature of risk involved in home improvement. As a result, fewer lenders offer this type of loan.

Despite the drawbacks, a 203k can be a good option for those handy-man, do-it-yourselfers who don’t mind spending a little more time and work to find the home of their dreams.

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