Have you heard people talk about an FHA 203K loan and wondered what it was and how it worked? Buying a home is far more challenging when you are not familiar with common mortgage lingo.
You may have heard about an FHA loan but what do the extra numbers and letters mean? When you are buying a home that needs work, an FHA 203k could be an excellent financing option.
A fixer upper can bring challenges to get a mortgage when the condition is really bad. This is where an FHA 203K renovation loan comes in real handy.
If you’re considering a home renovation mortgage, it’s important to understand the pros and cons of a FHA 203K loan. This loan is great for small to medium-sized renovations, and can be a great way to get started on your home improvement project. However, there are a few things to keep in mind before you take out a 203K. Let’s look at everything you need to know about this loan product.
What is an FHA 203K loan?
An FHA 203K Loan is a type of loan that can be used to purchase a home in rough shape. The loan is available from the Federal Housing Administration (FHA). The FHA requires that you have a good credit history and meet certain income requirements. The interest rate on an FHA 203K Loan is typically lower than the interest rate on a conventional loan.
With an FHA 203k renovation loan, you can get additional money to fix up the house on all one mortgage. For example, if the roof needs to be replaced and the baths need to be gutted, you can figure in the costs to replace these items within the loan you get from the lender.
The 203k loan program allows home buyers to borrow money from the government to help finance renovations or new construction. This type of loan is available for a variety of projects, including repairs and upgrades to your home’s exterior, additions such as a second story or garage, and even complete new construction.
If you’re buying a house, any of these projects are likely eligible for financing through the 203(k) program.
What are the pros and cons of an FHA 203k loan?
Before jumping into any loan program, you will want to understand the upsides and downsides. Let’s take a careful look at the pros and cons of a 203k renovation loan.
Pros of an FHA 203k loan
- A 203k loan has a low down payment requirement of only 3.5%.
- The requirements for your credit score and income are more relaxed compared to other loans.
- FHA 203k loans have both fixed and adjustable rate options.
- Seller contributions are allowed up to six percent of the home’s purchase price.
- There are lower closing costs vs. other loans.
- You don’t need to pull money out of your savings or max out credit cards for doing home improvements.
- You will have only one loan instead of two.
- A larger tax deduction is available due to interest from the home purchase and renovation combined.
Cons of an FHA 203K loan
- You can only use an FHA renovation loan for your primary residence. An investment property does not qualify.
- There is more rigorous paperwork required from lenders when getting an FHA 203k.
- Most of the time you can’t do the work yourself – it needs to be a licensed and approved contractor.
- You will pay a mortgage insurance premium as part of the loan.
Final thoughts
An FHA 203k loan is a terrific loan product that is very popular among first-time home buyers who are purchasing a property that needs work. Sometimes the housing choices are available for those with lower incomes. It takes the hassle out of having multiple loans on the same property by streamlining into one loan.
Be sure to speak with a qualified mortgage lender to determine your best loan options.
