FHA 203k ("Rehab") Loan

If you've found a home that’s perfect, but needs fixing, FHA 203k loans can finance both the purchase- and repair-costs.
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What is an FHA 203k Rehab Loan?

An FHA 203k rehab loan is a type of home loan which can be used for both the purchase and repair or renovation of a home. FHA 203k rehab loans are insured by the Federal Housing Administration (FHA), which means that if the borrower defaults on their loan, the FHA will pay the lender to help them recoup some of their losses. The insurance of the FHA helps keep requirements, interest rates, and down payments lower. Down payments can be only 3.5%. FHA 203k rehab loans are unique among home loans as they simultaneously provide funding for both the purchasing of a home and the repairs on the home. With conventional home loans, these two activities need to be funded with separate loans, which can prove to be a problem as many lenders won’t provide loans for the purchase of a home that is in disrepair.

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The FHA’s insurance helps keep interest rates down relative to conventional repair loans. However, if you contrast FHA 203k loans with home loans which do not provide funds for repairs, the rates are significantly higher. This is partly due to the administrative costs for repair loans are much higher. There is a significant increase in paperwork, with arrangements which need to be made between the lender, borrower, and the contractor. Periodic site inspections have to be made throughout the process. The lender also needs to manage the gradual release of the funds. All of these processes cost the lender money, so increased interest rates and fees are used to compensate the lender for these costs. Another aspect which increases the rates for FHA 203k loans is the added risk which comes with repairing a home. Repairs and renovations often have many unforeseen costs, and the impact of those repairs on the value of the home are also difficult to predict. Lenders increase rates to compensate for the added instability of the situation. In addition to the raised interest rates, there are also a number of additional fees that go along with FHA 203k rehab loans. This includes a supplemental origination fee of $350 or 1.5% of the repair costs (whichever is larger), as well as fees for all of the appraisals throughout the process.

Credit Requirements

Due to the added instability of the nature of repairs, credit requirements for FHA 203k rehab loans are higher than regular FHA home loans. FHA home loans are sometimes given to borrowers with credit scores as low as 580, whereas most lenders are asking for credit scores of at least 620 or 640 for FHA 203k rehab loans. In addition to the credit requirements, FHA 203k rehab loans also ask that you have a debt-to-income ratio of no more than 41%, which mean that less than 41% of your monthly income can be spent on your obligatory monthly debt payments. The home the funds are used for can be no larger than a four-unit home, which the borrower must use as their primary residence once repairs are complete. The home needs to be older than one year old. You can use FHA 203K rehab loans to tear down a home and build a new one, so long a significant portion of the original foundation remains. The repairs to the home need to total at least $5,000. As with other FHA loans, there is a maximum limit on the value of the home it’s being used on. These maximums are based on the number of units the home is and the county that the home is in. The value of the property is set whichever is smaller of the cost of the property plus the cost of the work done to the home, or 110% of the appraised value of the home after the work is completed.

FHA 203k Limit

FHA 203K limited loans are home repair loans for homes which require less than $35,000 in repairs. These loans are available to homeowners looking to improve their home, or home buyers looking to make some relatively minor changes to their home before they move in. As the repairs are smaller the amount of oversight from the lender is typically lower, which makes the process both faster and cheaper than regular FHA 203k loans. In addition to the smaller cap on repair costs, there are some restrictions on the use of these funds. The FHA restricts the use of these funds on any structural change or repair, such as moving a load bearing wall or fixing a crack in the foundation. Luxury purchases are also restricted, such as building a tennis court or gazebo. Any repairs which are projected to last longer than six months also do not qualify for FHA 203k limited loans.

How Does a 203k Rehab Loan Work

In contrast to traditional home loans, which require the borrower first to take a loan to purchase a home and then take a second loan to improve or repair it, the 203k rehab loan provides the funding to both purchase and rehabilitate the home with the same loan. This avoids many complications, such as situations where the home is in too much disrepair to qualify for a mortgage, or a borrower getting a loan for a home that they intend on improving before living in and not qualifying for the second loan needed to make the repairs. This also saves the borrower from paying the closing cost on two separate loans. If you're looking to take out an for an FHA 203k rehab loan but have more questions first, talking to an expert is a great way to get informed. Choosing the right loan is important, and it's worth taking the time to get set up with the terms that best suit your circumstances. Otherwise, get your documents in order and start comparing lenders, and you'll be on your way to getting your new home sooner than you think.

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