Most mortgage lenders only provide loans once the value of a property is firmly established. This allows them to know the exact value of the collateral they accept in exchange for a mortgage. When a house is in need of repair, a homebuyer will need to get transition financing before a long term mortgage. The Federal Housing Administration (FHA) offers the 203k rehab home loan program to solve this problem.
The goal of a simplified 203k mortgage is to provide the three required financing portions for a fixer-up in one step: initial financing, funds for repairs and a long-term mortgage. The borrower only has to guarantee a loan to do all three instead of three separate loans. This can save a considerable degree of hassle and eliminate the possibility of a borrower having trouble getting a long term mortgage loan once the rehab home loan is complete.
The loan of the FHA 203k is a loan guarantee. This means that the loan comes from a private lender, usually one who is FHA qualified. Then, the FHA guarantees the loan, which means that it is insured against default. If the borrower cannot continue the payments, the FHA will buy the loan on delinquency. The lender has a very low degree of risk in this scenario.
The FHA does run low-income or low-paying borrowers. However, the FHA has very high credit standards. If you have outstanding tax payments, defaulted on a previous installment loan or default on a government loan, you will not qualify. In general, even if your credit history is short, you will be required to have no substantial negative activity on your report in order to qualify for the 203k loan option. The property you buy must also be eligible.
If you fail to get the 203k loan, you will be able to move through the rehab home loan process with greater ease than private, separate loans. You will know the terms of your long term mortgage ahead rather than waiting after the rehab home loan is completed to find out the total cost of your financing.
With the 203k option, you will see some disadvantages. The biggest risk is the limitations you may have on the improvements and changes you can make. Several inspections may take place while the property is being improved to ensure the final product will meet FHA standards. Finally, these loans may take longer to finance because the government agency is involved and has more regulation on existing property, adjustment plans and the final product.
Why a 203K FHA loan is beneficial
Say you want to buy a house that needs some major repairs. One option you have is to buy it as part of the FHA 203K loan program, which is basically a loan that pays for your major repairs by adding these costs to the loan.
How to get started: Qualification for this loan is as qualification for any other mortgage. You will need to have a job, and the lender will check your debt-to-income ratio among other things. Then you are on your way.
How to qualify for a FHA 203K loan
Find a real estate agent who is ready to guide you through this process. It’s a hard way to buy, if you need to have an agent with a little patience, calm and reserve.
Find a loan officer who is certified to make FHA 203K loans. Not all lenders manage them, and only a few loan officers are trained to deal with them. You must select a credit institution that is large enough to have a trained staff for this loan process and able to do all the paperwork. Small lenders cannot handle this process.
Find the house. The loan program is designed to help pay for the major repairs needed, such as roofs, siding, and mechanical and electrical boxes. However, you can get some funds to do some modernization and renovation of the house as well. There are a lot of excellent fixer-top out there that would be great candidates for this program.
Once your offer is accepted, you will need to start getting offers on the job you wish to have done. Some of the work can be done before closing — especially if it is essential to make the house habitable. Other work may be paid for after the closure of funds withheld or held in “escrow” by the lender. Many times, the lender will want to escrow more funds than necessary to ensure that everything is paid for.
What Else to Expect
When you get your loan, an appraiser will make a determination of the value of the property in its current state and in its future finite state. The appraisals essentially involve the appraiser by looking at comparable sold properties in the area to determine a value for your property. The appraiser looks at a great distressed property as being under construction, with the finished house expected to be almost like new.
There may be some variations in your particular FHA 203K loan scenario, but this should give you a general idea of how to get started and what is waiting for you along the way.