Unless you are buying a newly built home in a recently constructed residential development, chances are, you will likely be buying a previously-owned property, and sometimes a real fixer-upper. However, and most often, buying new is not where you will find the best deals and bargains.
Yes, it may take a thorough home inspection, appraisal, and rounds of back-and-forth negotiations, including immediate improvements and upgrades to make the house truly your own, there are options to help make buying a fixer-upper all worth the time and effort.
This is what the 203k Loan is all about, and why you should consider it when planning to buy a fixer-upper.
The Federal Housing Authority (FHA) guarantees the 203k loans which are funded by lenders. This type of loan will allow you to purchase the house, make renovations, and still have enough funds to seek temporary housing for six months.
In a 203k loan, homebuyers are required to complete the home improvement project within six months. It is a must to hire only licensed contractors who are knowledgeable about the 203k loan process because there will be a lot of paperwork and documentation involved. Contractors will be paid through an escrow account.
There are two types of 203k loans. The Standard 203k is funded for extensive rehabilitation projects such as structural improvement, extensions, room additions, remodeling, or landscaping. The building plan must include all safety code requirements. The minimum borrowing amount is $5,000, and you can borrow up to 110% of the home’s projected value after rehabilitation.
The Streamline 203k, on the other hand, is the faster and easier option. You can DIY the work as this loan is intended for minor repairs. The maximum borrowing amount for the project is $35,000 and all the repairs must be completed in 3 months. Room additions and structural work are not allowed, but you can fix the roofing systems, HVAC, plumbing, electrical connections, flooring, and other home fixtures. Due to the simplicity of its process, more lenders offer the Streamline 203k loan.
Both of these types can be applied to purchase and improve single family homes and condominium units. Luxury upgrades like tennis courts, swimming pools, and barbecue areas cannot be done with the 203k loan.
To qualify, you must be able to prove a stable source of income and employment history. A minimum credit score of 640 is also required, with a debt-to-income ratio at least 31/43. You may apply even if you are not a first time home buyer, as long as you are a verified U.S. citizen or a permanent resident. This loan is not available for house flippers and real estate investors, as the borrower must be the one who will occupy the home.
The interest rates for the 203k loans vary, but are usually 1% higher than standard loans. This is already cost effective since you no longer need to apply for a separate loan for home improvement. Term options are either a fixed rate mortgage for 15 or 30 years or a variable rate loan.
Since 203k loans are insured by the FHA, you can pay as low as 3.5% for the home down payment. However, due to the nature of the process, lenders may charge supplemental origination fees, ongoing fees, and mortgage insurance premiums. Shop around for 203k lenders to see the most affordable options.
203k loans require a tremendous amount of patience and paperwork, but the results are worth it. It is an all-in-one loan that helps you buy a house with a lower down payment, and transform it into your own haven.
“We shape our buildings; thereafter they shape us.” – Winston Churchill (Commons Chamber, 1943)
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