When you are buying a house, normally there are a few repairs you need to pay for. The buyers that are looking to take on a fixer-upper will face the prospect of several projects. If you are faced with this problem, it might be a good idea to consider an FHA 203(k) loan that is also called a section 203(k) loan or a mortgage rehab loan. It combines the financing for repairing or remodeling and buying a home. This mortgage product is backed by FHA or the Federal Housing Administration allowing the home buyers to borrow sufficient money to cover the cost of repairs and purchase.
How does it work?
The 203(k) loan will be between 15-30 years adjustable or fixed-rate mortgage. The amount that can be borrowed depends on different criteria such as the income of the borrower and his credit rating. The down payment you need to make is around 3.5% of the buying price in addition to the repair costs. The maximum amount you can get as the loan is 110% of the appraised value of the home. In addition to this, the lenders will ask the borrower to pay for mortgage insurance. The interest rates charged for the 203(k) loans are likely to be higher than the traditional loans.
Another catch here is that the total amount to be borrowed must be within the FHA limits for the area where the property is located. In the majority of the cases, these home renovations are carried out by licensed contractors however, sometimes that 203(k) borrower can complete most of the work by himself. But this will need approval from the lenders. The 203 (k) renovation loan is a great thing for the older houses rather than the new ones that do not need too much renovation. The 203(k) loan offers great refinancing rates for cash-strapped homeowners that cannot tap the home equity.
FHA 203(k) loan types
There are two types of FHA 203(k) loans.
1. Limited 203(k): This kind of loan involves a simpler application process as it is used for projects that are valued at less than $35,000. Although there are no minimum cost requirements, you cannot pay for structural repair by using this kind of loan.
2. Standard 203(k): A standard 203(k) loan is used for extensive jobs that cost more than $35,000. The minimum amount for taking this loan is $5000. You can perform structural changes such as additions or other full home renovations by using these loans. The homebuyer has to obtain architectural exhibits and meet different building codes.
Pros and cons of 203(k) loans
Similar to all kinds of mortgages there are pros and cons involved in FHA 203(k) loans.
Pros
- There is a single loan available for both buying and renovations.
- There is a smaller minimum down payment needed.
- You need a relatively lower credit score.
- You get lower interest rates than credit cards, home improvement loans, and personal loans.
- The loan covers the mortgage payments when you cannot live in the property at the time of renovations.
Cons
- You need mortgage insurance.
- Interest rates are likely to be higher than standard loans.
- More extensive repair work means more paperwork.
- There is a possibility of additional costing due to architectural assessment.
- May need the oversight of a HUD consultant.
Costing involved in an FHA 203(k) loan
The closing costs of an FHA 203(k) loan are pretty much similar to other kinds of refinances and mortgages. They are usually 2 to 7% of the sales pricing of the property. But some lenders might charge additional fees for this kind of finance. FHA sets the rules related to the closing costs that may be paid by the borrowers. Any other costs are normally not allowed and they are the responsibility of the seller or lender especially when you are refinancing existing loans. Some of the costs you are expected to pay are,
- Appraisal and inspection fees.
- Lender origination fee.
- Title search and title insurance.
- Property survey.
- Credit report check.
The 203(k) loans will need an upfront mortgage payment of around 1.75% of the overall loan amount but this can be included in the financing. You are also going to pay a monthly mortgage insurance premium that depends on the length of the mortgage and loan-to-value ratio.
When you are looking to get affordable financing for remodeling or upgrading the house, the FHA 203(k) is a great alternative. If you are looking for an experienced building contractor in Tampa, FL area for your needs look no further than Hybrid Construction for your work.
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