Flooded, storm-ravaged homes; some needing costly repairs, others deemed unlivable or totally destroyed. That’s the aftermath of Hurricane Harvey and possibly hot-on-its-heels Hurricane Irma. The FHA recognized this daunting task of rebuilding homes post-Harvey via its 203k loans.
These rehabilitation mortgages are oftentimes referred to as two-in-one loans. With a single 203k loan, you buy (or refinance) a home and finance its repairs, a fixer-upper as properties needing repairs are called. Another use of 203k loans is rehabilitating existing homes.Interested in getting a rehab loan? Check with lenders here.
The Makings of 203k Loans
FHA 203k loans have rules that are similar to FHA’s 203(b) loan program or basic single-family mortgages.
Take a look at some important features of 203k loans:
- Down payment. You can come up with as little as 3.5% of the home’s purchase price as your down payment. This depends on your credit score, anything at 580 or above can qualify you for this small down payment.
- Interest rate. FHA 203k loans are fixed-rate mortgages. Current FHA rates per se can go lower than conventional loans. As of FHA’s last tally in 2013, rates on 30-year fixed-rate mortgages averaged 3.5%.
- Mortgage insurance. Like any FHA loan, 203k loans carry mortgage insurance premiums that are paid upfront and throughout the life of the loan. An upfront MIP represents 1.75% of the base loan amount while annual MIPs which are paid monthly are 0.85% for most FHA loans (LTV of higher than 95%).
- Fees. Unlike standard FHA loans, 203k loans require review of rehab plans and architectural documents, fees on these and supplemental origination can be asked by lenders. Appraisal fees also tend to be higher on 203k loans for that same reason.
Repair cost. FHA 203k loans require repairs or improvement projects to total at least $5,000.
The Benefits of 203k Loans
Because 203k loans are essentially FHA loans, they carry the leniency and flexibility that FHA-backed loans are known for.
Easier qualification. For a score of 580, you can take advantage of the 3.5% down payment. If your score goes under, say 570, you could still be eligible for an FHA loan but the down payment is higher. Because FHA loans are targeted for low- and moderate-income households, it’s easier for anyone in those income brackets to qualify. Debt-to-income ratios, which measure how comfortably you can pay your mortgage obligations, can be allowed up to 43%. Down payment, as noted again and again, is just 3.5% if you have the qualifying credit score.Let’s help you find a lender.
Less costly process. Imagine lumping together the need to buy a home and the need to repair it. In the ordinary course of things, that means two separate transactions with attendant costs and timelines. By rolling these two transactions into a single mortgage loan, you not only save on costs but follow a more expedited timeline.
More convenient mortgage repayment. With 203k loans, the boundaries between purchase/refinance and renovation costs are blurred. What you pay every month on your mortgage goes to both.
Wider scope of eligible repair activities. From virtual reconstruction to landscape work, FHA 203k loans can foot the bill for these projects. FHA 203k loans come in two types: standard and streamlined.
- You are looking at standard or full 203k mortgage if the repairs cost more than $35,000. Activities under standard 203k loan usually deal with the home’s structure; although to be clear, a home must pass basic structural standards and building codes for the underlying loan to be insured by the FHA.
- If your repairs are cosmetic touch-ups, jobs that require below $35K, then you can go for a streamlined 203k.
It’s only when each project comprising the whole repair work is completed that funds are released to the contractor. You will hire an FHA 203k consultant to check on the work if it’s correct and timely.
All Rolled Into One
You will be working with a professional to help you draw a detailed plan for the rehab work. Expect to submit more documents than usual; your contractors are not exempt from this paperwork.
Compared with a standard FHA mortgage or any other basic mortgage for that matter, the 203k process can take longer because of the documentation to be reviewed by the lender.
Nonetheless, the FHA 203k mortgage presents an opportunity to buy a fixer-upper for the price of a single mortgage.Click to See the Latest Mortgage Rates»