What happens when you find a home that you love, but it won’t pass the FHA appraisal? You probably think you are out of luck with FHA financing, but you aren’t. There’s a solution – the FHA 203K loan. This loan provides financing to purchase the home and fix it up to make sure that it meets the FHA guidelines.
Keep reading to learn how the program works.
The Two Types of FHA 203K Loans
There are two types of FHA 203K loans – the streamline 203K and the standard 203K. The streamline loan provides limited funds but requires less paperwork. The full 203K provides you with funds up to 110% of the home’s ‘after repaired value’ but requires much more legwork to get completed.
- Streamline 203K – You can borrow up to $35,000 in addition to the amount necessary to purchase the home. You cannot make any structural changes to the home. Everything must be cosmetic or ‘minor’ changes. You don’t need to hire a loan consultant or have blueprints drawn up for this loan.
- Full 203K – You can borrow up to 110% of the value of the home after the repairs. The appraiser can help you determine that amount based on the repairs you plan to make. You may need blueprints depending on the complexity of the repairs that you do. You can also conduct structural changes on the home including adding rooms and knocking down walls. You do have to hire a loan consultant for this loan. This person helps you work with the lender and the contractors to make sure everything goes smoothly.
The Types of Repairs
The sky is the limit with the repairs you can make with FHA 203K loans, but it does depend on the type of loan that you take.
If you use the FHA 203K streamline loan, again, you can’t make any structural repairs. You can only make cosmetic repairs or those that don’t affect the home’s structure. The most common repairs include:
- New roof or repairing the existing roof
- New appliances
- New flooring
- Painting the interior or exterior of the home
- Making minor repairs or renovations to the kitchen or bathroom
- The installation of new doors or windows
- Install or repair a patio or deck
- Finish a basement (nothing structural)
If you use the full 203K because you either need to borrow more than $35,000 or you need to make structural repairs, you really don’t have a limit on the repairs that you can make. Your only limitations are those set by your budget and what the loan consultant has to say. For example, if you come up with renovations that won’t have enough of an impact to the home’s value, the loan consultant may suggest that you come up with other ideas.
How it Works
Whether you take the FHA 203K loan or the streamline 203K loan, they work in a similar fashion. You apply for one loan and only have to verify your qualifying factors for one loan. You also only attend one closing. At the closing, you sign documents as you would a standard purchase loan. The money for the purchase of the home goes to the seller as normal. The remaining funds are placed in an escrow fund. The lender or loan consultant then manages the funds according to the contract drawn up with the contractors.
Sometimes the lender agrees to pay the contractors a portion of the funds upfront to buy materials and start the job. The remaining funds are disbursed on a regular schedule as determined by the contractors and the lender prior to starting the work.
The contractors must start the work within 30 days of the closing. If you are unable to live in the home (full 203K only), you may live elsewhere, but you should be able to move into the home within six months. In fact, the work must be completed within six months.
The loan consultant and/or lender won’t disburse any funds until the work is complete according to the contract. The home must also meet all FHA codes as well as any city/county codes before money will be paid out. The lender will also make sure that there aren’t any mechanic’s liens on the property before they disburse the final funds.
When you get an FHA 203K loan, you make your normal mortgage payments as you would with a standard FHA loan. Once all of the work is complete, the loan is the same as any other FHA loan. The difference is that you are able to buy a home that doesn’t meet FHA requirements and make it meet those requirements with the funds borrowed.