This FHA-backed home rehabilitation loan offers a guarantee to lenders so you can get a loan for more than your home's current value.
In this article, we'll discuss FHA 203k loans in great detail to help you determine whether it's a suitable alternative for your needs and budget.
What Is an FHA 203k Loan?
Also known as an FHA Construction Loan or a Rehab Loan, an FHA 203k loan allows homeowners and homebuyers to refinance or finance not one but two important items:
- The home itself
- Needed repairs and modernizations
This government-backed mortgage is meant to encourage homebuyers in low- to moderate-income brackets to buy houses in dire need of repairs, especially those in senior communities. The program allows you to buy and renovate a house under one adjustable-rate or fixed-rate mortgage. The amount you can borrow includes the home's purchase price and renovation cost.
This mortgage can also cover temporary housing funding, which might be paid as rent when your home is under rehabilitation. The dual-purpose loan removes the need for you to make two separate loan applications for a mortgage and a home loan application for renovations.
Lenders are usually unwilling to offer mortgage loans for houses needing significant repairs because of their safety and livability standards. Fortunately, FHA 203k loans offer reassurance to lending institutions since the renovating cost is included in the loan package.
The renovation charges are usually placed in escrow accounts and given as payment to contractors as the job is completed. Remember, complete house renovations shouldn't take more than six months, as specified by the FHA guide for 203k loans.
Types of FHA 203k Loans
Generally, there are two types of FHA 203k mortgage loans: standard 203k and limited 203k. Both loans apply to families and individuals who intend to make the home their primary residence. This means house-flippers and estate investors don't qualify for FHA 203k loans.
Keep in mind that a licensed handyperson must do the renovations. However, if you qualify as one, you may act as your general contractor and do the entire work, using the cash saved for additional home improvements or cost overruns. But you cannot be reimbursed for your labor.
The FHA 203k Standard Loan
The FHA 203k Standard loan is usually used when a house involves non-safety related landscaping, needs structural work, or when the redecoration costs exceed $35,000. The minimum amount that you can borrow is $5,000. However, the total value of your home must still lie within the FHA mortgage limit for Polk County, Florida.
In addition to a contractor, you'll be required to work with a HUD Consultant who'll help ensure you've met all minimum property standards and your contractor has completed the task according to the contract.
Some of the extensive repairs that FHA 203k standard loans cover include:
- Bathroom and kitchen remodeling
- Landscape improvements
- Addition of energy conservation systems
- Improvement of health and safety standards
- Implementing access tools for disabled individuals
- Window and door replacements
- Addition of heat and air conditioning systems
- Flooring and painting
Note that redecoration's considered luxurious or extravagant, such as new swimming pools, tennis courts, and pavilions, aren't covered under these loans.
The FHA 203k Limited Loan
If your home doesn't need much work, you'll want to consider using the FHA 203k Limited loan. Your total renovation budget must not exceed $35,000. You'll need to complete a written work plan demonstrating your understanding of your contractor's bid. And unlike the Standard loan, you won't need to have a HUD Consultant.
Some of the repairs that FHA 203k Limited loans cover include:
- Refinishing flooring
- Replacing tub and showers
- Adding gutters and downspouts
- Roof repairs
- Replacing countertops in kitchens and baths
- Replacing windows to increase energy efficiencies
- Updating HVAC, electrical, and plumbing
Note that this option doesn't include structural work on the property, such as landscaping or adding new rooms. Your house must also be habitable throughout the remodeling period.
The HomeStyle Renovation Loan
The HomeStyle Renovation loan permits homebuyers to include financing for home renovations in a refinance or purchase transaction on existing properties. This mortgage offers a convenient way to make repairs and renovations totaling up to 75% of your property's as-completed appraised value with a first mortgage.
With this alternative, you won't have to go for a home equity line of credit, a second mortgage, or other more costly financing modes. The HomeStyle Renovation loan covers the following renovations:
- Adding new carpet
- Creating an open floor plan
- Updating all fixtures
- Adding new kitchen appliances
- Adding an on-suite bath
- Building a pool
- Remediating lead-based paint
Eligible borrowers include investors, nonprofit organizations, individual homebuyers, and local government agencies.
How Can You Get an FHA 203k Loan in Polk County, Florida?
It's worth noting that the Federal Housing Administration (FHA) is not a lender but a mortgage insurer. So, you can get this loan by applying through your credit union, bank, or any other lender. Remember, not all lenders offer these loans. Consider checking HUD's approved lender search to find an approved lender.
Before we dig deeper into applying for an FHA 203k mortgage, let's first look at the loan requirements and who can qualify for an FHA 203k mortgage loan.
Who Qualifies for FHA 203k Loans
If you're interested in FHA 203k mortgage loans, you must know what you'll need to qualify. The good news is that FHA's flexibility makes qualifying for 203k loans much more accessible than typical renovation loans.
Credit Score Requirements
When applying for a home or car loan, your credit or FICO score will always come into play. Luckily, it's getting much easier for borrowers to get approved for FHA-backed home loans.
FHA allows scores as low as 580, but some lenders might require scores of 620-640 to qualify for 203k mortgage loans. Still, that's much better than the 720 or higher than what you'd possibly need for conventional construction loans.
Minimum Down Payment
Like all FHA mortgage loans, the 203k boasts a low down payment requirement. You only have to make a down payment of 3.5%, depending on the buying price and the total project cost. For example, a $200,000 property with $30,000 in contingency costs and repairs would need a down payment of $8,050.
Remember, closing costs also apply and are included in your down payment. Generally, closing costs for 203k mortgage loans are between 3%-6% of the buying price.
If your credit score is between 500-579, you may receive down payment assistance through state home buyer programs. Monetary gifts from friends and family or approved nonprofit organizations are also permitted.
FHA 203k Loan Limit
Using an FHA 203k mortgage, you can apply for up to 110% of your home's proposed future value or the purchase price plus renovations. However, remember that the total loan amount can't exceed your region's FHA loan limits. These amounts are usually capped at $970,800 in high-cost counties and $420,680 in low-cost counties.
Income and Debt Requirements
Lenders will also check your debt-to-income ratio. This is the comparison of your gross monthly income and loan payments.
Generally, less than 43% of your monthly income should go toward your proposed loan payments and all other debts. For instance, if your monthly income is $5,000, your credit card bills, student loans, car loans, and future house payments shouldn't exceed $2,150 each month. That's $430 in loan payments per $1,000 of your pre-tax income.
Before applying for an FHA 203k loan, you must ensure that you intend to live in the house you're buying. If you plan to do repairs and sell or rent the property, 203k loans aren't for you.
All FHA loans, including the 203k loan, are available to eligible U.S. citizens. Lawful permanent residents can also apply for these home loans. Your lender will verify your citizenship during the application process.
The Process of Applying for an FHA 203k Loan In Polk County, Florida
The process of applying for an FHA 203k loan is similar to that of traditional home buying, with some modifications:
This application process involves a lot of work. Fortunately, your lender will guide you and help drive the approval process.
Choose an FHA-Approved Lender
When applying for loans through government programs, whether an FHA loan or a VA loan, your choice of trustworthy lenders will be somewhat limited. And because the 203k loan application process is complex, you don't want to risk working with lenders who lack experience with this loan product.
Create a Rehab Proposal
Aside from the standard loan application requirements, such as credit reports and proof of income, the FHA 203k loan application requires you to create a rehab proposal. This proposal must describe what you want to do on the house and provide an estimate for each improvement or repair. Architectural exhibits, like a plot and interior plan, are needed for any structural repairs.
HUD can help guide you through what your proposal should address. It covers every part of your property that might need repairs, from windows and flooring to gutters and driveways.
If you hire a contractor, make sure you go for one licensed. On the other hand, if you decide to do the repairs yourself, ensure you promptly complete the work to professional standards.
Get an Appraisal
The property you want to purchase must be appraised, just like any other loan, except that your appraiser must give a rough calculation of your home's value after improvements and repairs are made. Plus, an as-is appraisal may be required, but the buying price can sometimes stand in for it.
Hire a 203k Consultant
For standard loans, the government requires you to hire 203k consultants to help you complete all the necessary paperwork, such as getting your architectural exhibits ready. The cost of hiring these consultants can be included in your loan, provided it doesn't exceed limits set by HUD.
For instance, for a property requiring $15,001 to $30,000 of renovations, HUD doesn't expect your consultant to charge anything more than $600.
You can also decide to hire a 203k consultant if you're seeking a limited loan. The only difference is that the hiring fee cannot be rolled into your loan. While completing the entire paperwork yourself is perfectly okay, you'll probably want the help of approved contractors.
Close the Loan
Once your loan is finalized, your contractor can begin the repairs and improvements. For more significant projects, arrange to stay elsewhere until the work is complete.
Consider financing up to six months of loan payments into your mortgage amount to help you move to another place during the renovation process.
Benefits of 203k Loans
With an FHA 203k loan, you can breathe life into your property and get the house of your dreams without breaking the bank.
Other benefits of applying for an FHA 203k loan include:
Lower FICO score and down payment requirements
Competitive rates compared to other loan types
Can you offer temporary housing while your house is being repaired
- Ability to combine home renovations and purchase into a single loan
Some prospective homebuyers wonder whether 203k loans are better alternatives than choosing two separate loans - one for the home mortgage and the other for repairs.
A single loan for repairs and mortgage streamlines the loan process. Keep in mind that two loans create more room for higher interest rates and missed payments.
Top 5 Desserts In Polk County, Florida
Over the years, Polk County has become one of the heavyweights in Florida's food scene, featuring a wide range of dishes. This diversity allows tourists and locals to have a delightful food experience, making them yearn for more visits.
If you're a food enthusiast, you're sure to feel satisfied, from the flavorful take on classic American desserts to the vibrant Mexican dishes to the simple yet mouth-watering flavors of Caribbean cuisines.
So, what are you waiting for?
Apply for your 203k loan, get your dream home, and start experiencing an extraordinary food adventure by trying out some of the top 5 desserts in Polk County on this list.
Arabella's Table-side Bananas Foster
This top-class establishment in Downtown Winter Haven's heart takes great pride in offering fine dining. One of the highlights on their dessert menu is the bananas foster that's made and served table-side (served for two).
They first sauté sliced bananas in a mix of banana liqueur, browned butter, and brown sugar. They then flambé it before serving it over vanilla ice cream.
Nineteen61's Tres Leches
It's not surprising that this top-end modern Latin American restaurant made a list of top 5 desserts in Polk County. Their on-brand Tres Leches cakes are absolutely to die for.
They contain three different kinds of milk (condensed milk, evaporated milk, and heavy cream), which makes these Mexican favorites creamy and delicious. You can't afford to miss tasting this sweet and delicious treat if you have a sweet tooth.
Scarpa's Italian's Raspberry Delight
Italian's Raspberry Delight is one of the best desserts in Central Florida. It's been a house specialty on the market for years, and its recipe has never changed.
The balance of texture and flavor in this one-of-a-kind dessert is superb. You get the feel of the velvet cream cheese and the crispy walnuts, and then you experience the combination of fresh, sweet, and tart.
Cotton Candy Burrito From Polk City Ice Cream Company
Wondering what this is? Visualize some freshly-spun cotton candy with three flavors of ice cream and two coatings of your choice. It's then rolled up like a burrito from Chipotle Mexican Grill before being cut into two for you to enjoy.
Peanut Butter Chocolate Ganache Pie From Bay Street Bistro
If you're into chocolatey desserts, you don't want to miss trying out the Peanut Butter Chocolate Ganache Pie from Bay Street Bistro. This decadent and smooth Ganache Pie is a crowd pleaser because it's homemade, and you can feel the love for making it.
Is an FHA 203k Loan Right For You?
If you need affordable financing to upgrade or remodel your property, whether you're a first-time homebuyer or a longtime homeowner, FHA 203k loans might be all you need. With this loan, you can gain immediate equity in your house by financing home improvements and repairs that add value right away.
Just do some comparison shopping to figure out what will work best for you and find the perfect FHA-approved lender in Polk County for your situation.