A FHA 203k loan is a perfect financial vehicle for first-time home buyers with limited budgets, especially because the prospective buyer can select an affordably priced fixer-upper or as-is home, and, with one single mortgage, have the funds for both the repairs and the price of the home included at closing. But, before you dive in, it’s necessary to know the FHA 203k loan requirements.
It would be a mistake to believe you may not qualify for this government program because it is specifically designed to address traditional hindrances that keep a large portion of society from owning a home, such as:
- Lender risks associated with first-time home buyers
- Less than perfect credit score
- High home down-payments and closing costs
- HUD properties in need of repair
- Properties located in marginalized areas
- Homes with housing code violations
- Multi-dwelling homes to be used as income and residence
- Buyers who desire older homes with remodeling needs
A Guide to FHA 203k Loan Requirements
First time home buyers are considered high risk for conventional home loans and face greater scrutiny in order to qualify. But since this is a government-insured loan, private lenders have less risk of loss if the homeowner defaults on the loan because the government backs the loan re-payment. This not only increases your chance of qualifying for the private lender, but these banks also attach more competitive interests rates because of the reduced risk.
A FICO credit score of 640 is the minimum score required to qualify for an FHA 203k loan. The FICO score is different from other credit bureaus, but it is calculated from your credit reports and is a reflection of your level of risk as a borrower. To receive a valid FICO Score, your credit report must have at least one account opened for six months or more, at least one account that has been reported to the credit bureau within the past six months, and no indication of a deceased person on the credit report.
A 3.5% minimum down payment for either the Standard or Streamlined FHA 203k includes not only the price of the home, but also the total costs of all repairs, all closing costs and fees associated with attaining the loan, and a 15% contingency for unanticipated costs. Compare this with the minimum of 5% down payment for conventional home loans and the prospective buyer is able to save thousands.
HUD property buyers can qualify for the FHA 203k loan requirements as these properties generally require repairs for housing code violations or property damage from former tenants — and often fall within marginalized areas that make it difficult to get conventional home loans. Keep in mind that the total appraised value of the property after all repairs and renovations must fall within the FHA mortgage limit for the area. Repairs must total at least $5,000 to qualify.
Multi-dwelling homes of up to four units will qualify if the purchaser designates one of the spaces as his or her permanent and sole residence. If commercial or retail space is attached, the loan can only be used to repair the living spaces. This presents a potential income generating option for those interested in using a home for living and also as a rental property. Loan limits differ by county and type of dwelling, so the maximum amount you can borrow will vary.
How to Navigate the FHA 203k Loan Requirements and Process
As with most government-run programs, proper paperwork, adherence to all requirements, and meeting all qualifications are essential. The following five tips will help in navigating the process and reduce prolonging the time before you can walk into your dream home:
- 1. As early as possible, work to get your credit in the best possible condition. This includes paying utility and other bills before the due dates and clearing all delinquent accounts as far as one year before you begin this process. The better your credit score and work history, the easier to find lenders willing to work hard for you.
- 2. Work with a real estate agent or broker who is knowledgeable with FHA guidelines. They will also be able to show you homes that will meet FHA 203k loan requirements. Check out HUD.gov to find HUD property listings and locate FHA-approved appraisers.
- 3. After finding properties you are interested in, you must choose a FHA-approved lender from this list. Also, the home’s appraiser must be FHA-approved, and the contractors hired to estimate repairs should be familiar with FHA documentation concerning repairs and costs.
- 4. Pay close attention when filling out paperwork and make copies for your own records. Incomplete application packages will prolong the process. Consider using a 203k consultant whose fees can be covered in the total loan. A consultant is valuable in setting up an appraiser and contractors and will handle much of the detailed paperwork needed by the lender, contractors and also for the buyer. Keep in mind that the buyer has the final say in contractor selections, so don’t feel pressured to choose any contractor you may not be comfortable working with.
- 5. Be patient — a FHA 203k loan can take 45 days or longer to close. The buyer can speed this process by completing paperwork and selecting contractors in a timely fashion.
Home ownership is a great experience and a fantastic investment for your future. Don’t get discouraged or think the process is difficult. When you choose the right team of real estate agents, appraiser, consultant, lender and contractors, attaining and rehabbing your new home will be a pleasurable experience.
The FHA 203k program offers many advantages and rewards, but like any loan program there are some confusing aspects involved with it, so don’t feel like you have to navigate the process alone. At Smartland, we are FHA 203k certified renovation contractors that specialize in working with you, banks, and lenders while you go through the FHA 203k program. For more information on our FHA 203k Renovation Services or to contact us to get started on the FHA 203k loan process, click the button below.