What Is A 203k Loan And How Does It Work?

What Is A 203k Loan?

Gustan Cho Associates

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?

FHA has set guidelines on the types of repairs that is allowed with a FHA 203k loan.  The mortgage lender may also have overlays on top of FHA on what types of repairs are allowed.
Here are the types of repairs that are allowed with FHA 203k loans:
  • 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.

A 203k loan consultant is normally hired to oversee the paperwork and draw of the 203k loan.  The 203k loan consultant fee is normally added to the overall 203k loan amount.
Mortgage rates on FHA 203k loans are normally higher than the standard FHA loan due to the risk factor to the mortgage lender.  Not all FHA mortgage lenders offer 203k loans.  If you are interested in a 203k loan, please contact me at www.gustancho.com or click here APPLY FOR 203K LOAN NOW  or call me at 262-716-8151.
The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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