Home buyers have it tough in today's real estate market. With many industry sources calling it "the strongest seller's market ever", finding a home that fits all the buyer's needs and desires is harder than ever. Even when buyers are lucky enough to find a home they love, they may not be able to get their purchase offer accepted due to fierce competition from other buyers who are willing to pay a premium or waive important contingencies to get their purchase offers accepted, and they may not be approved for a traditional mortgage to buy their ideal home. However, buyers who are worried about finding a home in their price range and getting their offer accepted may have a secret weapon at their disposal: The 203k FHA home loan.
Understanding the FHA 203k Loan
The FHA 203k loan allows home buyers to purchase homes that are in less than perfect condition. Since many home mortgage options require homes to meet inspection and appraisal standards that deem them safe and ready for occupancy, many homes with good potential are ignored because they need repairs or renovations.
In a tightening seller's market, buyers who can find the means to purchase one of these homes may be able to save a significant amount of money on their purchase. By using the 203k loan option, the buyer is able to finance the cost of both the purchase and the cost of renovations in one convenient loan.
Buyers Have Two Options for 203k Loans
203k loans are available in both streamlined and a full option, with the major difference being the type and amount of repairs that can be financed. In the streamlined 203k loan, a maximum repair amount of $35,000 can be financed and no structural repairs are allowed. This type of loan option benefits buyers who are purchasing a home that only needs cosmetic renovations, such as replacing damaged or outdated flooring, paint, fixtures, and lighting.
The full 203k loan option has no cap on the amount of repairs it will cover, as long as the overall loan amount stays within FHA's allowable loan amounts for the area in which the home is located. Because there is no cap on the amount of repairs, buyers can use this loan option to make structural changes or even take the home down to its foundation and rebuild, whether the home in Franklin or elsewhere. (Homes demolished for the purpose of rebuilding under a 203k loan must, however, retain part of the existing foundation in order to qualify.) Buyers who are interested in buying a distressed home with serious condition issues may find this option to be best for their situation.
Comparing the Streamlined 203k Loan and the Standard 203k Loan
How can home buyers who are interested in securing a 203k loan choose between a streamlined loan and a standard loan? These questions help determine the best choice to make.
- How much money do you need for repairs and renovations? A streamlined 203k loan has a maximum of $35000 available for your repairs. There's no limit for spending on repairs with the standard 203k loan.
- Will the property be inhabitable throughout the renovation? If the repairs to the home keep you from living in it at any time throughout the process, you need to choose a standard 203k loan.
- Does the property need structural repairs? If so, you need to go with the standard 203k, since the streamlined 203k loan is only for non-structural repairs.
- How badly do you hate paperwork? The streamlined 203k comes with less paperwork than the standard 203k. That's cuts down on the hassle of securing a mortgage loan.
203k Loans Use Standard FHA Loan Qualifications
Qualifying for a 203k loan uses the same guidelines used for traditional FHA loans, providing the amount to be mortgaged is within the same range as the amount of the buyer's FHA loan limit for a move-in-ready home. There are, however, some additional fees involved when opting for a 203k loan, including:
- Two FHA inspections at $150/each to ensure that all work performed meets FHA standards
- A 203k title update fee of $150 to protect FHA's position as first lien holder in the event that any contractor involved in the renovations files a claim disputing payment for their work
- A 203k supplemental origination fee of 1.5% of the cost of the renovations, or $350, whichever is higher, to handle the increased costs of the escrow account necessary for this loan type
- A 203k contingency reserve, which is 10-20% of the repair bid amount, to be held in the escrow account to cover any cost overruns the project may incur
Buyers who are interested in using a 203k loan to purchase and renovate a home should arrange to speak with an FHA lender as soon as possible. Since these types of loans have significantly more documentation and must be approved by the Federal Housing Administration (FHA), approval and processing times can be lengthy.
Prospective buyers who have additional questions about using an FHA 203k loan in their area should discuss the matter with their buyer's agent before beginning their home search. This will help provide them with more insight into the actual real estate market in their area and help them decide on whether to pursue looking at homes that fit the streamlined or full 203k loan guidelines.
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