$800! That’s how much you can save using an FHA 203(k) loan per year. If you buy a house that needs renovation or have a low credit score, an FHA 203(k) loan can help!
You can obtain the loan with a minimum down payment of 3.5% and a 580 credit score. Moreover, you can borrow up to $35,000 in repairs, improvements, or upgrades.
Federal Housing Administration backs these loans. You can take the help of professional lenders for quick assistance on such loans. Search for lenders online with Houzeo.
What Is an FHA 203(k) Loan?
A 203(k) loan is a government-backed renovation mortgage. It’s also known as a “rehab loan” or “home renovation loan.” These loans help low-to-moderate-income bracket families purchase distressed homes.
If you are a first-time buyer and have budget constraints, this loan can help you in the following ways:
- It allows you to finance the purchase and renovation of a home into a single mortgage.
- This loan can simplify the financing process and save you money on closing costs.
- FHA 203k loan allows lenient credit scores as their requirement.
- The loan covers the purchase price, renovation costs, and temporary housing.
- It eliminates the need for separate mortgage packages and renovation fees which are already placed in your escrow account.
What Are the Types of 203(k) Loans?
Here are the types of FHA 203(k) loans:
Limited 203(k) Loans
The limited or streamlined loan is for minor repairs and improvements in your property. You can’t add or remove structures. Only minor repairs like a roof leakage or an updated plumbing system is allowed. You can borrow up to $35,000 for such repairs.
Standard 203(k) Loans
The standard 203(k) loan is for major repairs to your property. You can borrow a minimum amount of $5,000. This loan covers repairs like flooring, bathroom and kitchen remodeling, heat and air conditioning systems, and landscape improvements.
Additionally, You can choose to paint, add energy-saving devices, and raise health and safety regulations. This loan finances both the purchase price and renovation costs rolled into one mortgage.
However, the FHA 203K loan does not cover luxurious renovations such as adding pavilions, new swimming pools, or game courts.
How Much Mortgage Can I Afford?🏡
Select Your Loan Type
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New Home Purchase
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Mortgage Refinance
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Cash-out Refinance
How Do I Get an FHA 203(k) Loan?
After you’ve identified a home to buy, you must apply for the loan through a bank, credit union, or a certified lender. However, only some lenders can offer these loans, you’ll need to find an FHA-approved lender.
The lender may ask for your Social Security Number and documents verifying your credit, debit, and income status. It is important to note that FHA is not a home insurer.
You will have to get home insurance and a warranty for your property. Also, typically FHA loans have lower closing costs than conventional mortgages, there might be additional fees.
Find an FHA Approved Lender
Look for FHA-approved lenders online or in your area. You can get the list of approved lenders on “The Department of Housing and Urban Development (HUD) website.” You should then compare their loan terms, interest rates, and fees to find the best deal.
Apply for the Loan
Once you are done choosing your lender and gathering your documents, submit your formal application.
Underwriting and Approval
Mortgage underwriting includes a review of your application and document verification.
Closing and Project Commencement
Once you get approval, you can start your renovation. However, there will be a final inspection to ensure the ongoing work meets FHA standards.
How Much Can I Save?
FHA reduces its MIP by 30 basis points which lets you pay only 0.5% – 0.55% on your loan balance. MIP is a mortgage insurance premium. The cost of an MIP is a percentage of your loan balance. The reduction of 30 basis points (BPS) means a reduction of 0.3% of your loan balance.
For example, the median home price is currently at $439,716, which would save around $1319. So, you can calculate your savings on your home value.
FHA 203(k) Loan Requirements
You must meet certain requirements to be eligible for the loan:
- Credit Score: You must have a credit score of at least 580 to be eligible for 3.5% down payment. In case of a lesser score, you may need to put down a higher down payment of around 10% to 15%.
- Debt-To-Income Ratio: Your debt-to-income ratio should not be more than 43%. This indicates that you are financially sound to pay the monthly mortgage payments.
- Property Eligibility: The property you purchase must meet basic safety and living standards. It should have a minimum of one bedroom and one bathroom, functioning utilities, and a sound structure.
- Type of Loan: Choose your loan type according to your requirements and proceed accordingly.
- Primary Residence: Ensure that your property is your primary residence.
Documents Required:
- Income proof
- Asset verification (bank statements, investment documents)
- Credit report
- Purchase Agreement of your property
- Renovation plans and contractor bids
Pros and Cons of FHA 203(k) Loans
Let’s look at the pros and cons of an FHA 203(k) loan:
Pros:
- You can get them for a relatively low credit score and down payment.
- These loans are government-backed, making it easier for you to obtain and pay back.
- A comparatively low interest rate than other home improvement loans.
- It combines the mortgage and renovation costs into a single loan.
Cons:
- You have to pay an upfront mortgage insurance premium (MIP).
- There are some requirements and guidelines that you must follow.
- You cannot use the loan cannot for investment purposes.
- You will have to work with a 203(k) consultant, which will add cost to your closing amount.
Is an FHA 203(k) Loan Right For You?
An FHA 203(k) loan is the perfect solution for you if you want to renovate your home on a budget. With low down payment requirements and lower interest rates, it’s a good option for first-time buyers. This government-backed loan offers accessibility through a relaxed credit score.
However, you should carefully evaluate the eligibility criteria and understand the application process and additional costs. Additional costs might include upfront mortgage insurance premiums and consultant fees. Check if everything aligns with your financial requirement and their objective.
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Frequently Asked Questions
What is a rehab loan?
A rehab loan or FHA 203(k) loan is financing option that combines the purchase price and renovation costs of a property into a single mortgage. It is ideal for buying fixer-uppers or upgrading homes.
What are the renovation limitations with an FHA 203(k) loan?
The renovation limit depends on the type of loan you choose. A standard 203(k) allows for major structural repairs and improvements. A limited 203(k) is capped at $35,000 focuses on non-structural upgrades like new paint or flooring.
What are the eligibility requirements for an FHA 203(k) loan?
Eligibility for FHA 203(k) house renovation loan requires you to meet FHA credit and income standards. You must use the property as a primary residence, and all your renovation plans should fall within the FHA guidelines.
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