What is an FHA 203K loan?
What is an FHA 203K loan? Can I use a 203K renovation loan to purchase my Arizona or California dream home? Every once in a while, I have a client that has found their perfect “dream home”. Only one problem, it needs some work. Either the seller doesn’t have the money to make the necessary repairs, or it is simply outdated and would be perfect if it was updated. Oftentimes, these homes sit on the market and are avoided. But what if I told you there was a way to buy your “dream home” the way it is, do all the repairs or upgrades before you move in – and all with just one simple loan!n
The FHA 203k renovation or rehab loan allows a buyer in Arizona or California to finance the purchase price of the house, plus any renovation costs – all with one loan. So no more last minute scrambling around before closing trying to repair the home so your bank or credit union will lend on it. And better yet, no more applying at 10 different banks after closing looking for a 2nd mortgage or HELOC (home equity line of credit) to finance repairs after closing. Say goodbye to living with leaky roofing for next five years while you eat rice and beans/ramen while you save up the money to get a new roof. An FHA 203k loan can take care of these repairs and more with just one simple loan transaction.
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The Two Types of FHA 203k Loans
I think it is important to understand that there are two types of FHA 203k loans: the full or standard 203k, and the Limited 203k or streamline, as it is sometimes called.
I will explain the differences here briefly, but will focus this article more on the FHA Limited 203K.
FHA Limited 203K
Standard FHA 203K
- Maximum $35,000 can be financed for repairs
- No structural changes allowed
- Structural changes are allowed. In fact, the home can be leveled and rebuilt. (If a home is demolished, a portion of the existing foundation system must remain in place.)
- No maximum repair limit as long as the entire loan is below FHA’s maximum loan amount for the region.
Limited 203(k) Mortgage Overview
Who is the perfect candidate for a 203k loan? This type of loan would be perfect for a borrower who already qualifies for a regular FHA loan, but ends up finding a house that won’t qualify for FHA financing “as-is”. In this case, a Limited FHA 203k loan would help the borrower purchase the home, and finance the cost of home improvements with just one simple loan. This is a win-win, the Sellers can sell and the Buyers end up with just one fixed rate loan and not two separate loans. And most importantly, the have their dream home.
One of the the most important notes for using the Limited 203k is the amount of money you can finance for repairs, which maxes out at $35,000. I bring this up because I have seen borrowers try to max out the $35,000, not realizing that there might be “soft costs” that also come into play, such as inspection fees throughout the process.
After closing, the 203k loan sets up an escrow account for the repair costs. This allows the loan to close before construction has begun. Why is this important! This is important because most sellers won’t allow construction to be done prior to the sale closing. More importantly, it protects you as it is never a good idea to sink money into a home you technically do not own. I know it is tempting, as the repairs will be done because the bank said they won’t lend on it unless they are completed. This is a true work around.
So if you think this program might help you, or you know of someone who is interested in purchasing a home that needs a little bit of work – or even refinancing to do some upgrades, then please reach out to us. 520-303-5620
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The information provided herein has been prepared by a third party company and has been distributed for education purposes only. The positions, strategies or opinions of the author do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction