FHA 203(k) Loans
Renovation Financing for Your Dream Home
An FHA 203(k) Loan is also known as a mortgage rehab loan, renovation loan, or Section 203(k) loan. These mortgages can be used to fund both a buying a home and renovations under a single mortgage. They allow those buying a fixer-upper to roll the cost of both the property and these projects into one loan. Here is SRK CAPITAL's comprehensive guide to what you should know about FHA 203(k) loans.
What Is An FHA 203(k) Rehab Loan?
How Does An FHA 203(k) Loan Work?
An FHA 203(k) loan is backed by the Federal Housing Administration (FHA). This type of FHA loan provides a way to borrow funds to cover the costs of buying and repairs.
Money obtained with an FHA 203(k) loan can be applied to both material and labor costs. These loans are offered as 15- or 30-year fixed-rate or adjustable-rate mortgages (ARM). And because they are insured and government-backed loans, 203(k) loans offer less strict requirements than conventional loans.
The closing costs for FHA 203(k) loans are comparable to those for alternate types of loans and refinances. Closing costs typically include a home appraisal fee, inspection fee, loan origination fee, title search and homeowners insurance.
Keep in mind that work covered under an FHA 203(k) loan must start within 30 days of closing. Projects must be completed within 6 months' time as well.
An FHA 203(k) Loan makes it possible to buy or refinance a home that needs significant care and improvement. The expenses linked with these efforts are added to the total loan amount you're qualified to borrow. The loan is then paid off over a period of years as you make your monthly mortgage payments.
Types Of FHA 203(k) Loans
The two types of FHA 203(k) rehabilitation loans are streamline and standard loans. We'll explore both of these mortgage loan options below.
Streamline FHA 203(k) Loan
A Streamline 203(k) Loan, or limited loan, is often used for homes that need fewer repairs. It allows home buyers or home owners to borrow up to $35,000 to cover the cost of renovations. There is no set amount needed to get one of these loans. Loan applications can be simpler to process due to the lower amount typically borrowed. Keep in mind that you can't roll major structural repairs into the money you borrower with these loans.
Standard FHA 203(k) Loan
Standard 203(k) Loans can be used to cover major structural repairs, or for projects that exceed $35,000. Renovations must cost at least $5,000, though, and you must hire a consultant from the U.S. Department of Housing and Urban Development (HUD) to oversee the renovation process. You must also follow specific rules and guidelines to make sure you're in compliance with government regulations.
What Can An FHA 203(k) Loan Be Used For?
An FHA 203(k) loan can be used to fund a variety of home projects, including, but not limited to:
Eligible Improvements
- Improving a home's curb appeal
- Installing or repairing roofing and flooring
- Making a home more energy-efficient
- Fixing health or safety hazards
- Enhancing a home's accessibility or functionality
- Overhauling plumbing and septic systems
- Redoing landscaping and groundwork
- Repairing or renovating gutters and downspouts
- Making changes that improve or modernize a home's appearance
Important Restrictions: Renovations like swimming pool, hot tubs, outdoor fireplaces, satellite dishes and barbecue pit aren't expenses allowed for a 203(k) loan. As a general rule, any upgrade or improvement that doesn't improve functionality or attractiveness of a home won't be covered.
Note: Certain types of properties are also be prohibited from these loans. These include mixed-use properties (which combine residential and commercial space) and co-ops. Be sure to do your research before applying for an FHA 203(k) loan.
FHA 203(k) Loan Requirements
As with any personal loan or mortgage, borrowers must meet certain set requirements to qualify for an FHA 203(k) loan. These requirements are like standard FHA loan requirements. Among them, you'll find that:
Lenders need applicants to have a credit score of at least 500 and debt-to-income ratio (DTI) no higher than 43%.
FHA loan borrowers have to pay an upfront mortgage insurance premium (MIP) that's equal to 1.75% of the FHA loan.
An FHA 203(k) loan requires a down payment of no more than 3.5% for those who have a credit score of 580 or above. The lowest is 10% for those with a lower score (in the 500 to 579 range).
A 203(k) loan can only be used if the property is the borrower's primary residence.
FHA loan limits let you borrow at most $472,030 in low-cost areas or $1,089,300 in high-cost areas for single-family properties.
Repairs and renovations must be performed by a licensed contractor, not the borrower.
To apply for an FHA 203(k) loan, you'll also need to work with an FHA-approved lender like SRK CAPITAL. Be prepared to show documentation verifying your identity, income, debts and credit score.
Using These Loans to Refinance Your Home
FHA 203(k) loans aren't just for prospective home buyers. They can also be used by property owners hoping to renovate real estate that they already own. You'll find that the process of refinancing a current mortgage into a 203(k) loan is like any other refinance. Although a FHA 203(k) loan can have more requirements involved.
If refinance with an FHA 203(k) loan, some of the money will be used to pay off your existing mortgage. Any remaining cash will be held in an escrow account until the repairs are done. Then, the funds will help pay off the costs of your home renovations.
If you took out an FHA 203(k) mortgage to buy your home, you can refinance with FHA streamline loan. Doing so can help you obtain a lower interest rate that helps you lower monthly payments.
Pros and Cons of 203(k) Rehab Loans
Like all types of mortgages, FHA 203(k) loans come with their fair share of pros and cons. It's important to do your homework before deciding whether an FHA 203(k) loan is right for you. Discover the pros and cons of FHA 203(k) loans below.
Pros Of FHA 203(k) Loans
- A relatively low credit score and down payment amount.
- The ability to offer you temporary housing while a home is being repaired.
- An interest rate that can be lower compared to other home improvement loans.
- The opportunity to combine a home buying and renovation loan into single mortgage.
Cons Of FHA 203(k) Loans
- The upfront mortgage insurance premium (MIP)
- The property must be considered your primary residence
- The inability to be used for investment properties
- The potential need to hire and work with a HUD consultant
Conventional Home Rehab Loans vs FHA 203(k) Loans
Qualified borrowers can get cash to buy a home and cover the cost of repairs with a conventional rehabilitation loan. There are many different types of conventional loans to consider. Compared to FHA 203(k) loans, conventional home loans have more stringent credit score and down payment requirements. But conventional rehab loans allow borrowers to implement more "luxurious" renovations and updates than the FHA would otherwise approve.
Consider Different Lending Choices
You'll want to look at different lending options. This means shopping around and comparing interest rates and loan terms before committing to a lender. Doing a basic financial assessment will also help you find the right loan program. It is important to know what you can afford when buying a home or any home improvements.
Is a FHA 203(k) Loan Right For You?
Whether you're looking for an affordable way to buy or remodel your home, an FHA 203(k) loan can make sense. Before moving getting started, take the time to compare mortgage lenders. You should consider FHA project rules and terms. That will help you decide whether this type of financing makes sense for your rehab project.
The Bottom Line
SRK CAPITAL offers both home buying and refinance FHA 203(k) loans. We can help you get started on your home rehab project.
Get started by getting in touch with SRK CAPITAL today. Your renovated dream home is only a phone call away.