What Is A 203k Loan And How Does It Work?
What Is A 203k Loan? The FHA 203k loan is a special mortgage loan program for owner occupant of residential properties, one to four units, that is offered by FHA, the Federal Housing Administration. The United States Department of Housing and Urban Development, also known as HUD, is the parent of the Federal Housing Admininstration, FHA. FHA is not a mortgage lender. It is a governmental agency that insures residential mortgage loans to private mortgage lenders such as banks, credit unions, mortgage companies, and institutions who are FHA approved to originate and fund loans. In the event of a borrower default, FHA will insure the FHA approved mortgage lender against loss from the foreclosure.
The Federal Housing Administration has created 203k loan programs to motivate and encourage FHA approved mortgage lenders to originate and fund riskier homes that are in dire need of rehab in communities and neighborhoods that need revitalization and promote home ownership in these communities.
What Is A 203k Loan? Goal Of FHA 203k Loan
The FHA 203k loan program were created and implemented to encourage home buyers to purchase homes that were in need of repairs or unhabitable. The 203k loan is an acquisiton and construction loan combined into one loan. The 203k loan will cover the cost of the home purchase as well as the cost of the needed repairs of the home. The down payment required is 3.5% of the after improved value of the property. Minimum credit scores required for 203k loan applicants is 580 FICO and the 203k loan lending guidelines are the same as those of general standard FHA guidelines with regards to credit scores, debt to income ratios, prior bankruptcy waiting period, prior foreclosure waiting period, and other FHA guidelines. Non-occupant co-borrowers are allowed with 203k loan programs.
What Is A 203k Loan: Purchase And Refinance
You can get a 203k loan for a home purchase where you purchase the home and will also have construction funds to rehab your home as well as a 203k loan on a refinance mortgage where you have an existing mortgage but you obtain a refinance 203k loan where the 203k loan will pay off your existing mortgage and get you construction funds all in one loan. 203k loan is a great mortgage loan programs for home buyers or homeowners who need to do repairs to their homes such as kitchen remodeling, bathroom remodeling, basement remodeling, new siding, new roofing, new windows, new flooring, new mechanicals such as heating and air conditioning systems, plumbing electric, and other types of repairs.
Types Of 203k Loan
There are two types of 203k loan programs. There is the FHA 203k streamline loan where no structural changes are allowed but you can do general remodeling such as kitchen, bathroom, basement, attics, flooring, siding, windows, roofs, painting, tiles, and any type of remodeling that is non structural. Maximum loan amount for a FHA 203k loan is $35,000 which includes reserves.
The full standard FHA 203k loan can exceed the $35,000 streamline limit and there is no limit. Structural changes can be made. Repairs covered under the standard FHA 203k loan include room additions, second story additions, as well as interior remodeling.
Requirements For 203k Loan
Only owner occupant residential properties, 1 to 4 units, will qualify for FHA 203k loan programs. Tear downs, as long as the foundations will remain, will qualify. Homes that are at least one years old will qualify for a FHA 203k loan. Condominiums can qualify for a FHA 203k loan only if the condominium complex is FHA approved. Homes that will require to be moved to another location with a new foundation can qualify for a FHA 203k loan.
What Types Of Repairs Are Allowed?
- Disability access to the home
- Heating, ventilation and air conditioning systems
- Plumbing repairs and complete new plumbing
- Roofing, siding, windows, gutters, sofits, fascia
- Energy conservation systems
- Kitchen and cabinets remodeling
- New appliances such as refrigerators, oven, dishwasher, stove, washer, dryers
- Room additions as well as second floor additions
- Decks and patios that is permanent fixtures to the home.
- Bathroom renovations
- Attic and basement remodeling
All repairs needs to be completed no later than six months and the general contractor cannot be the homeowner.