December 12th, 2018


There are more home loan options out there than some might realize, and the FHA 203K loan is one that allows you to borrow money to not only purchase a home but to improve it - all in one loan. While they may also be considered for home improvements these are generally best used when you need to buy a home and spend money repairing, remodeling, and improving it. And since FHA 203K loans are guaranteed by the US government, it's often much easier to get approved and get a better interest rate.

The Basics Of FHA 203K Loans

Sometimes, you find that perfect property, only to realize that it's not entirely what you're looking for. A property that has it all except for some improvement and renovation issues isn't something that you have to skip over in your search for the perfect home. Instead, think about using an FHA 203K loan to buy and renovate - all with the same loan money. Here are some of the basics you'll want to understand.

Funds - Your loan will allow you to borrow enough money to purchase a home and make any needed improvements and renovations. When you borrow, you receive the funds for both. This eliminates the need for multiple loans.

Rates And Qualifications - FHA 203K loans are secured by the Federal Housing Authority. This makes it easier to receive a loan since lenders are more likely to provide the loan due to the government's backing. And, it helps you get a much better interest rate.

Temporary Housing - You may need a place to live during the construction and improvement of your new home. These loans actually allow you to borrow extra money to cover rent or an existing mortgage for up to six months

Who's Eligible? - Only those buying their home or nonprofit organizations can use an FHA 203K. Investors aren't able to use the program, and it's intended for one to four-unit properties.

Accessing Funds - Your renovation funds are put into an escrow account, which is then paid out as the project progresses. All work must be finished within six months.

Loan Specifics

There are a few guidelines that must be met if you're considering an FHA203K loan. For example:

You must borrow a minimum of $5,000. Maximum amounts will vary depending on location, but the average homeowner will fall well within those limits.

You can borrow up to 110% of the home's value after improvement.

Interest rates vary but are often around 1% higher than a standard loan. The reason is that lenders do extra work and because the approval process is better. You can qualify with a lower interest rate. However, some lenders may offer lower rates than other loans due to the government backing. It's best to shop around.

You will also need as little as 3.5% of the total home price as your down payment, which is far lower than traditional loans require.

Working With A Contractor Or Doing It Yourself

Many people have a DIY work ethic. But with an FHA 203K loan, you can't take over the project on your own. Instead, you'll have to use licensed contractors for any and all work. You'll also need them to be familiar with the paperwork and processes involved in the 203K loan and follow all rules set forth by its guidelines.

The 203K loan isn't for everyone. But, those who are looking to buy a home and need the money to renovate it as well will want to take a closer look at what it offers.