FHA Loans Explained
There are many loan options available on the market for homeowners. When it comes to home renovations or if your dream home is a fixer-upper, the FHA 203(k) loan was designed to specifically fund those types of homeowner projects. Buying a home in need of repairs can be a great option for buyers seeking more purchasing power. The Home Loan Expert is here to help take a closer look at what exactly an FHA 203(k) loan covers, who qualifies, and who would benefit the most from this type of loan.
What is an FHA 203(k) Loan?
With an FHA 203(k) loan, also known as a Rehab Loan or FHA Construction Loan, homeowners can update, modernize, or do a total renovation of their home. It is a great option for home buyers who are looking to buy a property that doesn’t meet inspection standards as is. As a government-backed mortgage, an FHA 203(k) loan is intended to help lower-income home buyers leverage more purchasing power on a home. Both the purchasing price of the property and the costs of renovation and repairs are covered by this loan.
There are two types of FHA 203(k) loan options available. A standard 203(k) loan is issued for properties that need extensive structural repairs. This could be anything from repairs and replacements of the building’s foundation, load-bearing walls, and pillars to roofing repairs and replacements. The cost of the rehabilitation must be at least $5,000. A limited 203(k) loan applies to non-structural repairs. This allows for materials to be removed from a building without compromising the load-bearing or exterior walls and the roof. It can include things like doors, cabinet sets, flooring, trim, windows, and other finishing materials. Repairs under a limited 203(k) loan are capped at $35,000.
What is the Process for an FHA 203(k) Loan?
Applying for an FHA203(k) loan is a similar process to other loan types, with some loan-specific variations. Here are some general things to expect when applying for an FHA 203(k) loan:
- Use an FHA-approved lender. There are a limited number of lenders who cater specifically to borrowers applying for this loan type. You’ll want to be sure to choose a lender who can simplify the application process for this specialty loan.
- Come up with a Rehab Proposal. As a home buyer, you will need to have a rehab proposal constructed, outlining the repairs and renovations to be done to the property. It must provide an itemized cost estimate for each repair or improvement. This can include repairs related to improving a home’s curb appeal, functionality or accessibility, repairs to roofing and gutters, flooring installation, resolving any health or safety hazards, overhauling any home systems for better efficiency and plumbing, as well as landscaping and groundwork. For any major structural changes, a plot plan or proposed interior plan is required. Use the HUD’s checklist to see what needs to be included in your rehab proposal. Every project must be completed up to code and regulation standards with qualified professionals, whether you hire a contractor or do it yourself.
- Get an appraisal. 203(k) loan appraisals are based on the expected market value of the property upon completion of the proposed rehabilitation or improvements. This means that both you and your lender want to make sure the anticipated improvements will support an increased market value of the property once renovations are completed. In some cases, an as-is appraisal may be required.
- Get a 203(k) consultant. It is mandatory for borrowers using a standard 203(k) loan to have a consultant help them complete the extra paperwork relating to major structural repairs. This fee can be bundled into your mortgage as long as it falls within HUD guidelines. Limited loan borrowers do not have to seek the services of a consultant. Costs on a limited 203(k) loan cannot be rolled into your loan.
- Have a steady, verifiable income. Your lender will want to verify that you have enough steady income to repay your loan and other debts. You’ll need W2’s, pay stubs and a debt-to-income ratio of 31/43, where 31% of your income goes towards housing costs, and 43% towards housing expenses and other long-term debt.
- Meet the minimum credit score requirements. A credit score of 580 is required to be approved for a loan along with a down payment of at least 3.5% of the home’s purchase and repair costs. Credit scores that fall between 500 to 579 will require a 10% minimum down payment. Talk to your lender to check what their credibility requirements are.
- Intent to occupy the property. This loan is intended for those who wish to use the property as a primary residence, not an investment property.
- Purchase mortgage insurance. An FHA loan requires that you pay two types of mortgage insurance premiums (MIPs). The first is an upfront MIP that you pay one time at a rate of 1.75% of your total loan value made at the start of your mortgage. It can be rolled into your loan. The second type, your annual MIP, is paid monthly over 11 years or the life of your loan. Once your loan-to-value ratio (LTV) reaches 22%, your lender is required to drop your MIP charges. Once your LTV hits 20%, you are able to request that it be dropped.
Clearly, there are a few extra steps when it comes to applying for a 203(k) loan. That’s why choosing an experienced lending Expert matters even more when applying for this specialty loan.
How Can The Home Loan Expert Help?
The Home Loan Expert is made up of a team of friendly lending Experts who are well-versed in a variety of loan types. We’ve streamlined our underwriting process to make the approval process faster, cheaper, and easier — with closing times in as little as two weeks.
Our lending experts come from the same communities they serve, making us able to provide you with a relatable, first-rate experience. We have successfully helped homeowners get the best deal on their mortgage nationwide using a local vision.
Give us a call at 866-221-1913 to get started with your FHA 203(k) loan approval, or chat with us online if you have any further questions about the 203(k) loan process.