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.
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.