Many home buyers are attracted to an FHA 203k mortgage because it allows the prospective buyer to include costs for renovating older homes or adding energy efficient upgrades to newer homes with one financial product — one loan and one closing will cover the combined price of the home, along with the estimated costs for labor and materials for most repairs.
This type of home loan has opened doors for many people seeking their first home or even repeat home buyers attracted to the low down payment requirements. Knowing the pros and cons of an FHA 203k mortgage before you talk to a lender will help you make wise decisions on home purchases.
The FHA 203k Mortgage
The Federal Housing Authority (FHA) was established under the United States Department of Housing and Urban Development (HUD) umbrella to help rebuild America by providing improved housing conditions and more home ownership opportunities with multiple government-backed loan programs. The FHA 203k mortgage is a renovation loan program specifically aimed at reducing the risk for lenders while lowering down payments and buyer requirements with two distinct financial products.
The Full/Standard FHA 203k Program is used to increase the purchase of older homes or homes that involve complex structural problems or utility infrastructure conditions that would prohibit inhabiting the home upon purchase. This includes room additions, repair of structural damage, and other repairs that require scheduled contractor work for longer than 6 months.
The Streamline FHA 203k program is approved for less extensive home improvements that will not exceed $35,000; those that will not include the use of architects, engineers, or consultants. This streamlined program is a less costly and simpler option to buying and renovating homes in less than pristine conditions.
The Pros of an FHA 203k Mortgage
Single family or multiple dwelling units qualify, which includes apartment buildings with up to four dwelling units, making this a great way to enter into rental property investing. This loan can also be used for mixed purpose buildings or those that include a commercial or retail space, yet the loan can only be used to rehab the residential spaces of the building.
An FHA 203k mortgage can be used to finance HUD properties, which have been acquired as the result of foreclosure on an FHA-insured loan. While these homes are very reasonably priced, they may be in poor condition or have substantial housing code violations, which the 203k loan is approved to adequately correct. The home must be FHA-approved and the buyer must establish the purchase as the sole place of residence for the buyer.
An FHA 203k mortgage also eliminates multiple financial products because this one FHA financial product will cover the price of the house and any repairs, upgrades, or renovations. Any funds for renovation are set aside and placed in escrow at the time of closing. If the homeowner doesn’t have extra cash for home upgrades, often a separate loan is financed to complete the renovations before closing, leaving the homeowner struggling with multiple loans for a single home.
A government guarantee protects the lender that traditionally does not consider homes whose condition and value will not provide adequate loan security. An FHA loan does not provide house-buyer funds, but provides lenders with insurance to protect against losses. This reduced lender risk opens the door to buyers with less than perfect credit.
FHA income and qualification guidelines are less strict than conventional mortgage providers. With an FHA 203k mortgage, you can enjoy competitive interest rates with less than perfect credit, a smaller down payment, and lower income guidelines, making this mortgage perfect for first time home buyers.
The Cons of an FHA 203k Mortgage
There are property eligibility requirements pertaining to FHA 203k mortgages. For example, if the property is a condominium, the 203k funds can only be used for interior upgrades. It also requires an FHA approved inspector who must maintain oversight of all repairs, and an FHA approved appraiser, along with an FHA approved lender. The maximum loan is 110 percent of the appraised home value after renovations.
The buyer must pay a mortgage insurance premium (MIP) for the length of the loan, which may increase monthly payments. Also, keep in mind the required fee of $350 or 1.5% of the loan amount.
As with many government programs, the paperwork can be a challenge. There are numerous forms along with proper documentation from contractors concerning repairs and costs. The prospective home buyer must be attentive to the details in filling out paperwork.
Finally, be selective with the private lender you choose, taking preference to those that are on the FHA-approved lender list. By doing this, you avoid getting the run-around from the lender when it is time to pay contractors for the work they are to perform.
There are homes that have unfortunately been gutted or vandalized by thieves for their copper pipes, electrical wiring, lighting fixtures, and even bathroom and kitchen fixtures. An FHA 203k mortgage is the perfect loan to fix these homes. Older, architecturally-charming homes are also perfect for this financing vehicle. After renovating the property for structural and other exterior improvements, many homeowners are including high-efficiency, energy saving appliances, solar enhanced HVAC and water systems, and complete home automation systems to experience the beauty of the old with the technical comforts of a modern home.
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