An Interesting FHA Program
The Federal Housing Administration (FHA), a division of the Department and Housing and Urban Development (HUD), offers an interesting program named the 203K. With prices still high across the country, some people may figure they can save some money by buying a fixer upper. Do-it-yourselfers may want to consider the above-mentioned loan. In this little-known program, a loan for the purchase of a home and a loan for renovations are tied together into one neat mortgage.
The loan is available for 15 or 30-year mortgages, as well as for adjustable-rate mortgages (ARMS). The loan can be used for both materials and labor. As with any mortgage, you will need to qualify based on your credit score, debt-to-income ratio, and other factors. Also, renovations under 203K rules require renovations to start within thirty days of the closing and must be completed within six months.
There is also what is referred as a Streamlined 203K loan. This is tailored for homebuyers who need more minor renovations, below $35,000. In this case applications may be simpler due to the lower loan amount.
Proceeds from an FHA 203(k) loan and mortgage can be used to fund a variety of projects, including, but not limited to:
- Improving a home’s curb appeal
- Installing or repairing roofing and flooring
- Making a home more energy-efficient
- Fixing any safety hazards
- Enhancing a home’s functionality
- Overhauling plumbing and waste systems
- Redoing landscaping
- Repairing or renovating gutters
Luxuries such as swimming pools, hot tubs, outdoor fireplaces, satellite dishes or barbecue pits are not eligible. Also, mixed use properties which, for example may include commercial spaces are not eligible. Additionally, the home must be a primary residence, and the work must be done by a contractor, not the borrower.
Another good feature is that the loan can be used for a home that is already being lived in.
Some of the other advantages to a 203K loan compared to a standard conventional loan include:
- Lower credit score and downpayment requirements
- The FHA can provide temporary housing while the home is renovated.
- Lower interest rates that other loan types
Some of the disadvantages include:
- Usually requires upfront mortgage insurance.
- The application process can take a lot of time and paperwork to complete.
- FHA 203(k) loans cannot be used for Mortgage insurance.
- Projects may require you to hire and work with a HUD consultant.
- Cannot be used for an investment property.