FHA 203k Loans
FHA 203k loans are mortgage loans for a home that needs significant repairs.
What are FHA 203k loans?
FHA 203(k) loans are a type of government-issued mortgage for a home that requires a great deal of renovation work but has a lot of potentials – in other words, a fixer-upper. This FHA-insured mortgage allows the borrower to take out the loan for the purchase of the home as well as for the home renovation.
The benefit of this loan is that the property loan and renovation loan is all in one. The borrower does not need to apply for two separate loans: one for the mortgage and one for the home renovation. While the interest rate may be higher than a conventional mortgage loan, it is lower than the interest rates on a renovation loan.
An FHA 203(k) is also known as a construction loan.
How do FHA 203(k) loans work?
There are two types of 203(k) loans. Limited 203(k) loans are for smaller renovations that are valued less than $35,000. Standard 203(k) loans are for more extensive repairs greater than $35,000.
There is no minimum cost requirement for a Limited 203(k) loan. On the other hand, the minimum amount you can borrow on a regular FHA 203(k) loan is $5,000. FHA also has a maximum loan limit, which varies by geographic location.
One thing to consider is temporary housing during construction. Since some homes are uninhabitable, you may need extra funds to cover rent or your existing mortgage during the renovations. Housing costs can be included in the loan amount.
Like most mortgages, FHA 203(k) loans can either be fixed or variable. The loan term is up to 30 years. In general, you can expect to pay 1% higher than a conventional loan’s interest rate.
Like with other FHA loans, the minimum downpayment is 3.5%.
When you apply for the loan, you must provide a detailed proposal of the planned repairs. You have six months to complete your project.
The funds from your loan are placed into an escrow account. As the work is completed, the funds are paid out to contractors. Unfortunately, this also means that you are generally not allowed to do the work yourself. You must use licensed contractors that understand the 203k process as well as the rules.
What kind of renovations are covered?
This loan covers a wide range of expenses, such as remodeling, adding, or expanding rooms. You can even add a second story and upgrade all the plumbing, electric wiring, and heating.
This program will not cover “luxury” improvements, such as adding a tennis court or pool to the property. However, if there is an existing in-ground swimming pool on-site, you can use some of the funds to renovate that, such as to fill it in for health and safety reasons. Any improvements that do not become a permanent part of the property are excluded from the loan.