If you’re looking to purchase a “fixer-upper,” you just may want to consider the government-backed FHA 203k loan! The FHA 203k loan is a special type of rehab or renovation loan that allows buyers to borrow money for the purchase price of their new home and the necessary renovation costs. In essence, this loan combines your home loan and construction loan in order to streamline and simplify the process. You can also use a 203k loan to refinance and repair an existing home.
The FHA 203k loan is an especially helpful choice for first-time buyers who may wish to renovate a property, but don’t have the cash to do so — after all, renovations can be expensive!
For example, let’s pretend you’re interested in purchasing a $120,000 ranch home that is outdated and in need of major repairs. And, for the sake of round numbers, let’s say that renovating the kitchen and bathroom as well as fixing any electrical and plumbing issues will cost about $80,000. In the case of this home, you would obtain a 203k for a total of $200,000 and not have to come “out of pocket” for the construction work.
In addition to this standard 203(k) loan which covers structural changes, there is also a streamlined 203(k) loan for homes in need of less extensive work. Intended to be simpler and more efficient (less paperwork!), the streamlined 203(k) loan may be good for homes in need or smaller projects like a new roof, windows and siding, or finishing a basement. For this streamlined loan, the total cost of renovations must be less than $35,000.
Of course, there are a few caveats to the 203(k) loan. First and foremost, there is a lot of paperwork required and you must prepare an extensive proposal with estimates for all renovations prior to being approved for the loan. All work must be done by a licensed general contractor, and since you’ll be working very closely with this contractor, it’s especially important that you have a good relationship with him or her. Additionally, you’ll want to ensure that you have a FICO credit score 640 or above, as well as a 3.5% down payment plus closing costs. Other guidelines may also apply – be sure to ask your EveryHome agent or loan officer for details.