Okay, let’s start off with the definition of FHA 203(k). Investopedia defines FHA 203(k) as a “loan that factors in the cost of certain repairs and renovations into the loan.” Essentially, the FHA 203(k) enables the consumer to get money for home renovations on top of the home purchase.
These types of loans makes the home improvement process almost trouble-free. These loans are in fact, supported by the federal government.
Since this is backed up by the Federal Housing Administration (FHA) itself, it’s possible that you will receive a less rigid set of qualification requirements compared to other home improvement renovation loans.
So what is the skinny on the FHA 203(k) and how do we use these loans to fund home renovations and repairs?
First of all, let’s take a look at the two types of FHA 203(k).
The 203(k) limited loan and the 203(k) standard loan.
These two loans have varied rules, limits, and spending restrictions. For both loans, luxurious projects like new swimming pools or gazebos, do not qualify under home improvement.
The following projects can be covered by the Limited Loan. Basically, these are home renovation projects that do not involve structural problems and the cost is below $35,000.
Plus other things!
For the Consultant Loan, this is reserved for renovation costs that go beyond $35,000. This is usually for remodeling projects that require more sizable and substantial work.
Check out the following:
The above items are examples of projects that are qualified under “home renovation” or “home improvement,” among other things. It is important to note that these loans must be properly administered by a contractor and duly approved by an FHA appraiser.
Next question: Who qualifies for an FHA 203(k) loan?
A person is qualified for this type of loan if he or she has a favorable credit score. Also if he or she has not experienced a foreclosure of any sort within the last three years.
Perhaps you’re thinking to yourself “What do I need to submit in order to qualify for an FHA 203(k) loan?”
Well, pretty much the basics. You need an approved creditor from the FHA, your Social Security number, proof of income, debts, and credit history.
After considering all these, do you think FHA 203(k) is suitable for your needs?
If you’re purchasing a home that you already reside in, then this type of mortgage is your best choice. But hold your horses — don’t jump on the bandwagon just yet. Find out what the pros and cons are and compare them with your financial capability.
The upsides of a 203(k) are reduced interest rate than other personal loans, it can continue to pay for a mortgage during the makeover period and it requires a very minimal upfront payment and very few requirements for credit score.
The downsides are it can not be utilized for properties for investment, it requires you to have an HUD consultant, which is not easy to get, and finally, it requires an FHA mortgage insurance, which means additional cost.
Now, if after thorough consideration, you believe that this is for you, the next question to tackle is, “Am I eligible to apply for an FHA 203(k) loan?
Here are two words to remember…
Your credit score will always be in the picture whether you’re purchasing a residential property or a vehicle. The good news is, nowadays, buyers can get the green light easily for a home loan that is backed or supported by FHA. But make sure your credit score is not lower than 620. If your score is below that, it will necessitate additional paperwork and documents on your end.
Will this be your first time to buy a home?
If not, have you owned a home in the last three years?
The next requirement to make you a likely eligible applicant for an FHA 230(k) loan is this — the loan gives multiple options for first-time homebuyers. Now while FHA loans are available to everybody, it seems that they are more lenient towards first-time homebuyers because they don’t have that much funds for an upfront minimal payment.
Also, it only requires a downpayment which is as low as 3.5%.
Now that the cards are laid down on the table, do you think FHA 230(k) loan is for you?