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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.

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.