An FHA 203k loan allows you to borrow money, using only one loan, for both home improvement and a home purchase. These loans can also be used just for home improvements, but there might be better options available. 203k loans are guaranteed by the FHA, which means lenders take less risk when offering this loan. As a result, it’s easier to get approved (especially with a lower interest rate).
The Basics
Some properties are almost perfect – the location is good, and the property has potential, but significant improvements need to be made. Without those repairs, the home might not be suitable for living, and lenders might be unwilling to fund loans on a property with problems.
FHA 203k makes it possible for you to turn that property into a home. You are taking that property off the market and making it a valuable part of the community again.
Fund repairs and purchase: You can borrow enough to make your purchase plus enough to make the necessary improvements. Because the Federal Housing Authority (FHA) is involved, lenders are willing to move forward with a property they otherwise wouldn’t touch.
Temporary housing: Unless you want to live in a construction zone, you’ll need funds for other housing arrangements. In certain cases, you can borrow extra to cover rent or your existing mortgage for up to six months.
Project overview: Your project must be completed within six months. Funds are placed in an escrow account and paid out to contractors as the work is completed. It’s essential to work with reputable contractors who don’t underbid and who are familiar with the 203k process.
Eligibility: Owner/ occupants and nonprofit organizations can use FHA 203k, but not investors. The program is designed for one to four unit properties, but condo and townhome owners can use the program for interior projects. You don’t need perfect credit, because the FHA protects lenders in case you default, making it easier to qualify.
Depending on the type of improvements you have planned, other types of loans might be a better fit. For environmentally sustainable projects (like upgrades to more energy-efficient heating and cooling systems) a PACE loan can provide funding. PACE is available for commercial properties as well.
Loan Details
You must borrow at least $5,000, and there are maximum limits set by the FHA that vary by location. For most people buying a single-family home that is not extravagant, you’ll fall within these limits. For smaller projects, the limited FHA 203k (previously under the name Streamline 203k) allows you to borrow less with an easier process.
Interest rate: The interest rate will vary, depending on rates in general and your credit. Expect to pay a rate that’s 0.50% or so higher than you’d pay on a standard loan. Think of this as the cost of easier approval (or bundling both your purchase and improvement loans into one). Plus, lenders need to do extra work tracking the progress of your project and handling payouts. At the same time, the loan is insured by the FHA, so lenders might offer a lower rate than you’d get elsewhere. Compare offers and get the loan that works best for you.
Down payment: 203k loans can be either fixed-rate or variable rate loans, you can pay as little as 3.5% up front. However, there are good reasons for making a larger down payment whenever you can.
Contractors and DIY
203k loans give you the opportunity to make significant improvements to your home. You also get to fo the things that matter most to you: If you want to use green or energy-efficient appliances and materials, you’re free to do so. You can’t fund luxury items through 203k, but you can make dramatic improvements.
Unfortunately, you’re generally not allowed to do the work yourself. Even if you are skilled, licensed contractor, don’t expect to handle all of the work.
You MUST USE a licensed contractor, like McDonough Construction, for all work, and it’s important that they know you’re using 203k. This might rule out certain handymen you’ve used in the past. The 203k process is all about paperwork and following certain rules, so brace yourself for less freedom that you might have imagined when remodeling your home.
Ready to Get Started?
McDonough Construction is a licensed 203k contractor who has teamed up with the amazing local lender, Bobby Adams from Atlantic Bay Mortgage. Together they can get turn your house into the home of your dreams.