In most areas of the country, the number of homes for sale that are in need of at least a few repairs prior to moving in is substantial because many times in a short sale or foreclosure situation, the seller will allow the home to go into some state of neglect.
So, to help finance needed repairs to the home, buyers shopping for a mortgage should look into the FHA 203k loan program.
The FHA 203k and FHA Streamline 203k Loans
The FHA 203k loan program can be grouped into two different types of loans: the FHA Streamline 203k loan program and the FHA 203k loan. The FHA 203k streamline is designed to be a limited repair program and has simpler processes and no HUD consultant required like on the full FHA 203k loan. In my experience, the FHA 203k streamline is a more popular option since many of the needed repairs for bank-owned homes can be considered “cosmetic.”
Highlights of the FHA 203k streamline loan:
- It works very similar to a construction loan – it allows you to purchase a home that wouldn’t qualify for FHA financing due to repair work being needed
- The loan amount is equal to the purchase price of the home plus the amount needed for repairs
- FHA 203k streamline program allows for repairs ranging from $5,000 and $35,000
Highlights of the FHA 203k loan:
- Qualifying for FHA 203k loans are the same as regular FHA loans
- Repair work cannot begin until loan closes and the money to pay contractors comes from an escrow account set up when the loan closed
- FHA 203k loans require UFMIP and MIP just like regular FHA loans
- Appraisal required
- Currently available for owner-occupied properties only although rumors are surfacing of an “Investor 203k loan” coming soon.
The FHA 203k programs can be used to finance both needed improvements as well as wanted improvements.
The FHA 203k loan can go up to 10% over appraised value of the home. Here is a simple example that illustrates how the financing package works:
- As-is cost of a home: $150,000
- Improvement costs: $20,000
- Total cost of home after improvements: $170,000
- Required appraised value = $154,545
Simply put: With the 203k loan, it is possible to buy a house in need of repairs for $150,000, finance $20,000 worth of repairs and have the home appraise after the improvements for $154,545.
No wonder this loan is so popular option for financing a foreclosure, bank-owned property or a short sale.
Justin McHood works for Academy Mortgage and is based in Chandler, AZ. He is a contributor to Zillow Blog and has conversations about mortgages whenever he can. Learn more about Justin at http://www.mortgagecommentator.com.