What is an FHA 203K ?
FHA stands for Federal Housing Administration (FHA) and is part of the Department of Housing and Urban Development (HUD). FHA administers a number of single family mortgage insurance programs. These programs are all operated through lending institutions approved by FHA. One of those programs, the FHA 203k loan, is used for the rehabilitation and repair of single family properties. Single family properties include 1-4 units, condos, townhomes and PUD’s.
HUD does not make direct loans to consumers (homebuyers or homeowners) but FHA loans are funded by approved 203k Lenders and are then insured by FHA. What makes the FHA 203k Loan different? Most mortgage financing plans provide only permanent financing, in other words, lenders do not usually release funds to close unless the condition and value of the property are adequate enough to secure the loan. When it comes to rehabilitation, this means that the lender usually requires that improvements be made before a long-term mortgage is made. This is where the 203k loan comes into play because those improvements can now be made after the home loan mortgage closes.
FHA 203k Lenders
Many lenders offer FHA loans but the list of Lenders is short. Your best bet is to find and work with an FHA 203k Lender who is knowledgeable and experienced to guide you through the process. An FHA 203k lender can also do Standard (regular) FHA loans without renovations so working with a 203k Specialist will allow you to have additional FHA financing options without having to start the process over again.
FHA 203k Down Payment
As with standard FHA loans the Down Payment is the same, which is a minimum three and a half percent (3.5%). But there is a difference, the FHA 203k down payment is based on the total Sale Price plus rehabilitation cost as oppose to a Regular FHA down Payment that is based off the sale price only. To calclulate the 203k downpayment you can use our 203K Calculator here
FHA 203k Rates
Rates in comparison to a Standard FHA loan without rehabilitation funds can typically range from a quarter percent (.25%) to a half percent (.5%) higher. If you take into consideration the advantages of having one loan to purchase or refinance with additional funds included for improvements with minimal down payment or equity it is quite attractive compared to any other alternative.
FHA 203k Appraisal:
FHA 203k purchases and refinances both require an appraisal. Though here is a difference between a Standard FHA Appraisal and an 203k appraisal. A 203k appraisal will estimate the value of a property by including the improvements and project a “Future Value” of the property while a standard FHA appraisal doesn’t.
203k Loan Requirements
Loan Requirements such as credit, income, down payment etc. are the same as Standard FHA loan requirements. Both have the most flexible guidelines with minimal down payment than any other type of loan at this time. The difference between the two is that the FHA 203K will allow for the repairs, rehab or remodeling of your home to be included into the new loan while the Standard FHA 203B won’t.
FHA 203k Streamline Loan
The FHA 203k loan has two versions, the full version that allows for additions, conversions, structural alterations and pretty much all types of major work under or above $35,000. The Streamline loan can be used for minor improvements under $35,000 and does not require the help of a 203k consultant.
Is there a Fannie Mae 203k?
No, there is no Fannie Mae 203k, Freddie Mac or VA 203k loan available. There are some lenders that do offer conventional renovation loans but their guidelines have more restrictions.
The HUD FHA 203k is the only type of loan of its kind and the program is an important tool for community and neighborhood revitalization and for expanding home ownership opportunities for first time and repeat homebuyers. Since these are the primary goals of HUD, the Department believes that the FHA 203(k) is important and will continue to strongly support the program and the lenders that participate in it. This buy it and fix it or refinance it and improve it all in one loan program can be really helpful in this market or in any market for both homebuyers and homeowners. If you are intrigued by the idea of getting an FHA 203k loan for renovation then it’s definitely worth looking more into.
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