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What Is A 203K Home Loan?

Home buyers seeking a loan that can be used for home improvements as well as home purchases often turn to the 203K loan. This type of loan is the go-to resource for buyers with limited funds.

Home buyers who are just beginning their home search or who have found the house that they want to purchase should know about the 203K loan option and how it can help them to buy the home they seek. 

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

What is a 203K Home Loan?

A 203K home loan is an FHA backed loan for home buyers who want properties that need improvements. In some cases, 203K loans are made to purchase properties that cannot be lived in without these improvements. Securing a conventional loan for such a property can be difficult, because lenders shy away from properties that have serious problems.

203K home loans can be used for a variety of different purposes, including the purchase of the property, repairs to the property and temporary housing for home buyers who need somewhere to live while the home is being repaired. All repairs must be made within 6 months of the purchase of the home.

Who Can Get a 203K Loan?

Traditional owner/occupants are eligible for 203K loans, as are condo owners and owners of town houses. 203K loans are not available for investors. In order to qualify for the loan, borrowers must have income to cover the monthly payment, a debt to income ratio better than 31/43, and must have acceptable credit.

What Are the Benefits and Disadvantages of a 203K Loan?

For a home buyer who has little money to put down on a house and who wants a property that needs serious improvement, a 203K loan may be the perfect loan option for them. For buyers without much cash on hand, a down payment of as little as 3.5 percent may be accepted up front. However, buyers must understand that there are downsides to 203K loans.

As with other FHA loans, borrowers are expected to pay a mortgage insurance premium in the form of an up front payment and continued monthly charges. 203K loans require a lot of paperwork to be filled out by the home buyer and the contractor. Home buyers must work with contractors who are familiar with the 203K loan process, who are reputable, are known to bid accurately and have a good track record for completing work early or on time.

203K loans are notorious for taking a long time to process, sometimes too long for the sellers to wait. In a competitive market, some buyers will lose out to other buyers who are able to move more quickly.

203K loans also require buyers to make certain to-code repairs, and buyers may have little or no say in how these repairs are made. For example, these loans may require buyers to mediate lead-based paint from the house in a more costly fashion than the buyer would otherwise choose.

In addition, the interest rate for 203K loans is usually around 1 percent higher than the interest rate for a standard loan, because 203K loans require lenders to follow up through the repair process and track the completion of the home improvements.

Must a Contractor Be Hired to Fix the Problem?

Yes, a contractor must be hired to perform all repairs. Even buyers who are themselves contractors are often not allowed to make all of their own home improvements for a 203K property.

If you’re a home buyer who is thinking about purchasing a fixer upper property, a 203K loan may be for you. For more information about a 203K loan, contact your home lender today.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

Need a Home Mortgage Loan? VA Loans May Be the Answer

What Military Servicemembers Should Know About VA Home LoansAs a reservist or veteran, you may be uniquely qualified for a type of mortgage loan that can make homeownership more affordable. Those who are planning to make a small down payment may want to look into VA loans, in addition to conventional loans. There may be benefits to taking out a VA loan that would not apply to those who can only take out the typical home loan from a lender.

Spouses, as well as military personnel, may want to learn more about this special program and home mortgage loan product. Learn more about VA loans today.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

Have You Served Your Country?

Such individuals may want to apply for a VA loan. Those with a record of a minimum of 90 days of honorable service during wartime or at least 181 consecutive days may be eligible for a VA loan. Members of the Reserves, veterans, National Guardsmen, and their spouses may apply.

Why Apply for a VA Loan?

A VA loan is a practical alternative to traditional mortgage loans supported by the Department of Veterans Affairs. Borrowers may be allowed to put zero down or make a small down payment and still be approved for this loan, and applicants are offered more generous interest rates and have less stringent credit requirements. Because of this, even military personnel who have the means to make a down payment should still consider purchasing a home with a VA loan.

VA loans are one of the unique programs not requiring mortgage insurance for borrowers offering a small down payment. Private mortgage insurance (PMI) is required for borrowers who are putting down less than 20 percent on a conventional mortgage loan. PMI is also a requirement for borrowers who choose to take out an FHA loan. This additional payment goes to the lender and does not build equity. Borrowers taking out a VA loan do not have to pay PMI. Borrowers can use this savings toward home improvements or other bills.

What Documents Are Needed to Apply?

Surviving spouses and military personnel applying may want to gather a few documents when applying for a VA loan. Documents include:

These documents can get an individual or couple started on their application. A lender may be help an applicant get a Certificate of Eligibility later in the process. There are other factors that would be considered by a lender when applying for any home mortgage loan products. Prior to applying, individuals may want to pay down debt and improve their credit score. One may want to request a free credit score to get a better idea of what areas to work on if necessary.

Understand More about VA Loans

Those looking to purchase their first home may not be aware of the special loans they may qualify for by serving their country honorably. Borrowers may be able to get better terms when offering a down payment of less than 10 percent with a VA loan. Approved applicants may enjoy fewer related costs and more flexibility with this type of home mortgage loan product, including the possibility of covering closing costs in specific cases. For additional details about VA loans and eligibility requirements, speak to a VA mortgage loan lender.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

The First-Time Home Buyers Guide to FHA Home Loans

Making a First-Time Home Purchase? Why an FHA Home Loan Can Help!One of the major hurdles a first-time homebuyer must successfully navigate is obtaining a home loan. Those who have some type of credit blip or no real credit history at all often face real challenges in qualifying for a mortgage with acceptable repayment terms. Although not limited to this type of buying situation, the FHA home loan can often be a great choice for first-time home buyers who would otherwise struggle to obtain a conventional mortgage.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

Where can first-time borrowers go to apply for an FHA home loan?

Applying for an FHA home loan is relatively simple. Because these home loans are guaranteed through the Federal Housing Administration (FHA), they are readily available through most banks, credit unions, and mortgage lenders. Buyers can usually obtain a list of FHA home loan providers in their immediate area through their real estate professional.

What documentation is required during the application process?

Like most home loan application processes, prospective FHA borrowers will be required to provide several documents. These include:

  • proof of employment and income, including the two most recent pay stubs
  • bank statements for the two months immediately preceding the application
  • proof of identity and residency, including driver’s licenses, Social Security cards, copies of divorce papers, green cards, and work permits
  • credit reports, or copies of receipts to prove an adequate credit history, if insufficient credit reporting is available

Prospective buyers may also be asked for additional documentation during the initial application or later during the loan process in order to meet underwriting requirements or address any issue that may arise.

Will a credit issue prevent a borrower from qualifying for an FHA home loan?

FHA home loans are a good choice for first-time home buyers because it is possible for buyers to qualify for them under less stringent guidelines than those used for many other home loans, including most conventional loans. In fact, buyers who have some late pays, collection activity, or other blemishes on their credit report can be accepted in many cases. However, more serious issues, such as defaults on student loans or federal tax liens are not acceptable under the FHA home loan program.

Current FHA regulations require a credit score of just 620, with a small down payment of three percent of the home’s purchase price, as opposed to stricter conventional loans that require scores of 720 or higher for approval. In some cases, an FHA home loan may be approved for lower credit scores, if a larger down payment is made.

Will it be possible to use financial gifts for the down payment or closing costs?

Under FHA home loan guidelines, monetary gifts are acceptable for use toward the down payment and closing costs of the loan, as long as the gift meets certain requirements. For instance, it must be a true gift with no repayment agreement from a close relative or other approved source. In addition, the money must be correctly sourced and seasoned, in order to be accepted for this purpose.

First-time homebuyers who want to learn more about the FHA home loan process and what it can mean for their situation should start by discussing it with a trusted real estate professional, well before opting to start their home search. Their agent can provide them with helpful information about home types and conditions that are accepted under FHA home loan guidelines, as well as helping them locate a local lender who can walk them through the application and qualification process for the loan.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

How Do Mortgages Work? A Guide for New Homeowners

4 Common Mortgage Loan Types to ConsiderGetting a mortgage can seem complicated, once borrowers realize that there are several different types. With this information, potential home buyers will be able to distinguish the most common kinds of mortgages.

1. Fixed-Rate Loans

The standard mortgage loan that most people are at least vaguely familiar with is a fixed-rate loan with a specific term. The phrase “fixed-rate” means that the interest rate and the monthly mortgage payment are fixed for the duration of the loan. The term for a fixed-rate loan could be as low as 5-10 years but is typically either 15 or 30 years long. Although the borrower will pay down increasingly more principal on the loan over the years, the total payment for the principal and interest stays the same. Payments for private mortgage insurance, homeowners insurance, or property taxes may change, but the amount due for the loan itself does not. Fixed-rate loans are often preferred because they give buyers the benefit of predictability.

2. Adjustable-Rate Mortgages

Many people treat the fixed-rate mortgage as if it is the best mortgage available, but there are reasons people might consider an adjustable-rate mortgage (ARM). With an ARM, borrowers are often granted a lower introductory interest rate, which may generate a lower initial monthly payment. After a set period (usually at least a few years long), the interest rate and the monthly payment adjusts. This cycle is repeated at a defined interval, which may be every six months or a year. Although mortgage interest rates do not tend to fluctuate greatly from one month to the next, interest rates could rise significantly over a period of several years. As such, many people who start with an ARM eventually refinance their mortgages to a fixed-rate loan.

3. Conventional Lending

When home buyers start to look at homes, they may see references to the types of lending that sellers will consider. Conventional loans are frequently cited as preferred, so borrowers should understand the limits of this designation. Conventional loans are also sometimes called “conforming loans,” which means that they conform to the lending guidelines set by Fannie Mae and Freddie Mac. These are government-run organizations that buy up debt generated through conforming loans. Conventional lending usually carries specific requirements for down payments, assets in reserve, maximum debt-to-income ratio, and a limit on the size of the mortgage. Loans that fall outside conventional lending standards but are not in another specific category may be referred to as “nonconforming loans.”

4. Government-Insured Mortgages

In addition to conventional loans, potential home buyers may read about certain mortgages indicated by acronyms like FHA, VA, or USDA. These loans are insured by various departments within the federal government. The Federal Housing Administration guarantees loans for borrowers with limited ability to access conventional lending options. The Department of Veterans Affairs insures loans for current or former members of the military, with low down payment choices as a benefit of a certain amount of military service. The United States Department of Agriculture provides a guarantee for lenders who offer up to 100 percent financing for people who want to buy a home in rural areas. These loans may carry requirements above and beyond that of conventional lending, so they may not always be the ideal choice.

Choosing a mortgage means that borrowers need to know what is available to them. By understanding the difference between these types of mortgages, people can determine which mortgage will be best for their financial plans.

What You Need to Know About Capital Gains on a Home Sale

Why Capital Gains Don't Have to Be A Bad Thing for Home SellersThere is a lot of confusion when it comes to capital gains on home sales. Part of this is because there are so many exclusions that some people believe that capital gains don’t even apply to home sales. Well, the truth is that they do apply, but there are a lot of conditions and potential exemptions surrounding them. To use the law to the fullest advantage, real estate sellers should have a better idea of what they’re up against.

The Progressive Scale

Capital gains refer to the amount of appreciation on an asset over time. In this case, assets can refer to anything from stocks to real estate. So if a buyer purchases a home for $150,000 and then sells it for $500,000, their capital gain would be $350,000 minus certain deductible expenses. These gains are taxed based on a seller’s yearly income (for simplicity’s sake, capital gains are added to the seller’s income.) For long-term capital gains, those making $37,950 and under are exempt from taxes. Those making between $37,951 and $418,400 pay 15%, and those making anything over $418,400 will pay 20%.

Potential Exemptions

If a seller has made the home their primary residence for at least two years and sells the home within five years of the original date of purchase, they may be exempt from capital gains. Every owner of the home is allowed to exempt up to $250,000 worth of capital gains, whether the owners are married or not. The years of residence do not have to be consecutive, and the benefits can still be applied to rented homes so long as the criteria are still met. So if three friends are co-owners of a home, they can live in the home for the first six months, rent it for two years, and then move back in for 1.5 years before they sell. Professional home flippers should know that this benefit is not available to sellers more than once in two years.

Additional Deductions

Most home-related expenses are allowed to be deducted from the total net appreciation. This includes seller’s closing costs, real estate agent fees, and any potential renovations the seller did for the home. Sellers can even add on home sale costs from the original purchase of the home to close the gap even more. So if a buyer purchases a home for $100,000 and sells it for $200,000 10 years later, they’re able to limit the amount of taxes paid based on home renovation projects over ten years as well as real estate costs and fees.

1031 Exchanges

If a seller is purchasing a new property that’s similar in price, they may also be able to forego capital gains. So for the buyer who buys at $100,000 and sells at $200,000 10 years later, they may be able to purchase another property for $200,000 without having to pay capital gains. This option will defer taxes as opposed to eliminating the need to pay them all together, but it may make purchasing a new property a little easier to bear. A 1031 exchange can be a complex transaction, so sellers are highly encouraged to talk to a tax professional for more information.

Capital gains for home sales may have a lot of conditions and exclusions, but they don’t necessarily have to be a disadvantage for home sellers everywhere. Whether the seller has owned the property for six months or 60 years, there are ways to work with the rules to achieve a successful home sale.