FHA 203k borrowing may increase your home buying options, particularly in high-priced locations, and serve as an economical way to pay for renovations. The qualification requirements for 203k loans are typically more relaxed than those for other rehabilitation loans because they are FHA-insured.
But before you go seeking 203K loans, you should know how they work and what type to look for.
FHA 203k Basics
You can borrow up to 110% of the "after repair value" of your home with the FHA Full 201k loan.
The minimum down payment stipulation is 3.5%.
Owner-occupied 1–4-bedroom units that have been finished for at least a year are eligible for the loan.
A home that doesn't require repairs can be bought or refinanced with an FHA 203k loan to pay for the expense of modernization.
- Contingency funds are included to cover unforeseen repairs, and if the bid's items have all been completed, the money may be used for additional repairs or principal reduction.
FHA 203k Advantages
Increase your new home's equity right away.
You can use gift cards from family members for the down payment.
Co-borrowers who are not tenants are permitted.
You can combine the HUD $100 down a package with the 203k renovation program.
The seller may still cover up to 6% of the buydown and closing costs.
Owner-occupied financing is available for up to four-unit homes, PUDs, townhomes, and condos.
You can take out up to 110 percent of the property's estimated future value.
You can purchase properties for which conventional loans would not otherwise be available.
Transform a fixer-upper acquisition into your ideal house.
Rolls the home purchase and renovation costs into one loan.
Only a 3.5% down payment is required.
- Relaxed FICO score requirement -620 minimum score
Disadvantages of FHA 203k
What's the maximum dollar amount one can borrow for repairs?
There is no renovation spending cap on the FHA full 203K loan. However, several factors, such as the FHA county loan limits, will affect the size of your loan.
In Hillsborough, Florida, FHA loan limits are $ 420,680 for single-family homes, $ 538,650 for two-family homes, $ 651,050 for three-family homes, and $ 809,150 for four-family homes.
On the other hand, the streamlined 203k loan requires a total renovation budget below $35k.
Would I have to start making mortgage payments immediately if I bought a fixer-upper but couldn't live in it while it was renovated?
If the HUD consultant concludes that the house is uninhabitable, you can finance up to six months' mortgage expenses into your loan and won't have to make two housing payments at once.
When and how will the contractor be compensated for their work?
With this financing, there are no payouts to the contractor upfront or at loan closing. As construction proceeds and phases are finished, payments are made to the contractor.
Draw inspectors will check to make sure the work has been finished. The full 203k loan allows a maximum of five draws, while the streamlined 203k loan allows one initial and one final draw per contractor.
Is there a timeline for the renovation project?
Yes, all FHA 203k loans come with the stipulation that work must begin within 30 days of loan closing and may not cease for any 30-day consecutive day period. Work must be finalized within six months of loan closing.
How do FHA 203k loans work?
It's imperative to know that this outstanding remodeling loan has two types: the "full" and the "streamlined" versions. The nature and total cost of modifications you plan to make will determine whichever version you require.
The loan size and how you can use it for modifications differ between complete and streamlined 203k loans. The FHA classifies improvements like a pool or an outside kitchen as luxuries and is typically disqualified. For present homeowners, you can also refinance your mortgages into 203k loans.
The FHA Full 203K
When a home contains non-safety landscaping, requires structural repair or the renovation expenditures surpass $35,000, you can seek the FHA Full 203K, also known as the FHA 203K Standard loan. The minimum repair budget needed for this financing is $5000. The budget for renovations is unrestricted (FHA maximum loan caps apply).
For instance, a house torn down or reconstructed as part of a renovation is acceptable as long as the current foundation system is preserved. A structure of any size converted into a 1–4-unit building can be covered by this loan, and so is the remodeling of the residential part of a building that includes non-residential uses.
You must hire a contractor and a HUD Consultant (third party). The HUD Consultant will ensure that the contractor completes the work per the contract and that the minimum home standards have been satisfied.
What projects are eligible for the 203k full loan?
- Increasing the size of the windows to bring in more light
- Finishing an attic or basement
- Fixing foundational issues
- Removing wells to widen the floor design.
- Constructing a retaining wall to stop flooding.
- Fixing the pool
- Add a separate garage if there isn't one already.
- Expanding the kitchen size by extending it into the dining room
- Adding extra square footage
The FHA Streamlined 203k
When a home requires cosmetic touch-ups, you can seek the FHA Streamline 203K, also known as the 203k Limited loan. Homeowners and homebuyers can promptly and efficiently access cash to pay for non-structural property repairs or upgrades, such as those noted by a private inspector or an FHA-appointed appraiser.
Homeowners can use this loan to make their property move-in ready, maintain it, make enhancements, or even stage it for sale. However, there's no set minimum. The entire cost of the renovations shouldn't exceed $35,000.
The FHA Streamlined option doesn't require a HUD consultant. But you will be required to submit a written work plan to show that you understand the contractor's proposal. This loan cannot be used to support mortgage payments.
Eligible projects for Streamlined 203k Loan
- Replacing windows to improve energy efficiency
- Resurfacing floors
- Bathroom and kitchen countertop replacement
- Repainting the roof
- Changing the showers and bathtubs
- Adding downspouts and gutters
- Repairing septic
- Changing the siding
- Updating plumbing, electricity, and HVAC
Who is eligible for the FHA 203k lending program?
The 203k program, despite having a particular objective, is fundamentally an FHA home loan scheme. It follows the FHA lending criteria and has less strict qualification standards than a traditional mortgage.
Credit score - To be eligible for an FHA 203k loan, you need at least a 500 credit score. However, some lenders may set a higher minimum.
Down payment - If your FICO score is 580 or better, the minimum down payment for these lending programs is 3.5%. For borrowers with FICOs in the 500–579 range, you must put 10 % down. State programs for first-time homebuyers may offer down payment aid. Gift funds from friends, marriage, and blood relatives are accepted too.
Max loan amount - FHA loan limits in Hillsborough, Florida, are $ 420,680 for single-family homes; $ 538,650 for two-family homes; $ 651,050 for three-family homes; and $ 809,150 for four-family homes.
- Foreclosure - You will often not be eligible for an FHA mortgage if you have had a foreclosure within the last three years.
How can I apply for an FHA 203k loan?
To apply for these loans, you must select an FHA-affiliated lender and be prepared to supply your Social Security information and documentation of your earnings, debts, and creditworthiness. Consider your individual needs and characteristics as a home buyer when looking into your options.
Different FHA lenders are suited to different types of borrowers. For example, some work with borrowers with lower FICO scores, while others cater to first-time buyers.
Although the closing costs associated with FHA loans are often lower than those charged on conventional mortgages, additional costs like appraisal fees and loan origination fees may push costs up.
Here is a breakdown of the steps to purchasing a home using an FHA 203k loan.
Step 1 - Meet with a Loan Officer. You express interest in renovating a home and meet with an appropriate loan officer to discuss which renovation packages best fit your needs. Once you have chosen one, you will be given some information to give to your contractor.
Step 2 - Obtain pre-approval. As you look for a home, your loan officer will pre-qualify you for a mortgage and provide you with a range of sales prices and renovation sums.
Step 3 - Choose a house and a contractor. While searching for the ideal property, you interview potential contractors; you will choose the property and the contractor that pleases you.
Step 4 - Request a written offer from the contractor. Once you've found the perfect home and contractor, ask them to review any features you might like to add and those necessary to fulfill minimum property standards.
Step 5 - Send the underwriter all the relevant information. You will need to give your loan officer the purchase agreement and the contractor's projected bid to get your loan approved.
Step 6 - Engage the Services of a HUD Consultant. When applying for a full 203k loan, you must hire a HUD consultant to conduct an inspection and produce a written report of their findings.
Step 7 - An appraisal is requested. Once the contractor's bid has been reviewed and approved, your appraisal can be ordered. If you are altering the floor layout, specs and blueprints must be submitted.
Step 8 - Appraisal Review and Underwriting. Review of the appraisal and submission of the paperwork to underwriting.
Step 9 - Close the loan. The loan is closed once the paperwork mentioned above is completed. The seller receives payment for the purchase. The remaining funds for the home's renovation are held in escrow and released per the contract.
- Step 10 - Get settled in your new house. After the loan is closed, the improvements must start within 30 days and end within six months. If the work is not too significant, you can live on the property while it is renovated.
FHA 203k Loans - Creating Value Through Renovations
The decision to buy a home is a big one. This is not just an investment but also the place where you'll live. Buying a fixer-upper and investing in the improvements that suit your taste and lifestyle is better than buying a home that's already been fixed and paying for premium changes made by the previous owner, even though they may not suit you.
The advantages of using a 203k loan to buy or refinance a home that needs work include:
You won't have to pay for changes made by the previous homeowner
You can save money for renovations by purchasing a fixer-upper in the neighborhood of your choice rather than a recently renovated house. That's because one hasn't been renovated in many years while the other has just undergone remodeling, which raises the cost.
You won't have as much money to make improvements because of the high price of the recently renovated home. That implies that, for the time being, you will have to accept the modifications made by the previous owner. But with a 203k loan, you can immediately turn the fixer-upper into your dream house and settle in.
You get what you want now
With an FHA 203k loan, you can buy or refinance a house that requires work while adding the cost of the repairs to the loan. You'll receive a loan that covers both the costs of the purchase or refinances expenses and the upgrades, giving you the freedom to pick what improvements you want to make to the house.
On the other hand, you might be forced to take out a second line of credit, which would imply taking on a second loan obligation on top of your mortgage payments if you purchase a recently remodeled home only to find out that one or more things are outdated.
Earn "sweat equity"
You can wrap the cost of increasing the dining room, expanding the kitchen, adding a bathroom, or even a garage, into the mortgage and increase the value of your home in the process.
On the other hand, if you spend on a high-end remodeled home that meets minimum property standards but has no garage or only one bathroom, you may not have extra cash to add these changes, meaning you will have to contend with sharing a bathroom with your kids and leaving your car out in the open for now.
Top 5 Desserts in Hillsborough County, Florida
Nekter Juice Bar - Nekter Juice Bar is known for Juice Bars and Smoothies, Acai Bowls, Ice Cream, and Frozen Yogurt. They also have detox juice, which is beneficial if you overindulged on holiday treats and want to start eating healthier again. The other choices, including their lemonades and "skoop," are enticing. You should check out this location.
The Stuffed Cookie - Here you can make a stuffed cookie, a stuffed donut, a double stuffed cookie, or simply a cream sundae and cookie. Frozen yogurt is also available.
Gretchen's Goodies - This bar is known for bakeries and desserts. Everything is served in the cup so that you can take it on the go! The keto selections are made with almond flour and monk fruit.
Hampton Chocolate Factory - Drop in to indulge in gourmet treats, including frozen s'mores, Liege Belgian waffles, and cups and cones of rich ice cream!
- Remo's Deep Fried Desserts - This place serves delicious Fried cheesecake, Funnel cakes, Fried brownies, Ice cream, Boba tea, Fried oreo's ice cream Mochi, Edible cookie dough, MiniMelts, and more.
Wrap Up - Is your home in need of some TLC?
Many properties in the US need renovations. According to data from home surveys, almost a quarter of homes in the US were built between the 1950s and 1960s. FHA 203k loans can be used to finance any renovation project, whether you already own a home or want to buy one. A single loan can be used to both purchase and renovate a home.
Refinancing is also an option if you already own a home. Even if you haven't accumulated much equity in the property, you can pay for improvements by refinancing your current mortgage into a 203k loan. That way, you can add the things you need and prefer for a comfortable lifestyle and won't have to move.
However, 203k loan-financed upgrades are typically the responsibility of a certified contractor and subject to FHA appraisals and, occasionally, HUD consultant clearance. It's wise to start talking to prospective contractors early so you can start the project immediately after closing the loan.
You should look for a contractor with prior experience working on FHA 203k loan-financed renovations because this type of financing involves a lot of specific documentation and guidelines. The program also requires that the renovation be done within six months of the closing.
You can find more information about FHA 203k loans from your real estate agent or local FHA-approved lenders. Speak to them and see if this mortgage program is suitable for you.