FHA 203k Loans

FHA 203k loans solve a major problem for homebuyers. When your new dream home is a fixer-upper, getting a mortgage can be tough. Your bank won't lend the money to buy the house until the repairs are complete, and the repairs can't be done until the purchase house has been settled.

After renovation, of course, the property will be worth a lot more, and the cost of the renovations could easily be paid by extending the mortgage. But right now, the property isn't looking so hot, and lenders aren't keen to lend more than it is worth today.

FHA 203k loans were designed to address the Catch-22 that exists for buyers who need to "fix up" or renovate their property in order to make it livable. How do you pay the mortgage, pay for renovations, and pay rent, all at once?

FHA 203k loans can help you out of this bind, by allowing you to purchase or refinance a property plus include in the loan the cost of making the repairs and improvements. FHA insured 203k loans are provided through FHA approved mortgage lenders nationwide.

FHA 203k loans are only available to owner-occupiers.

FHA 203k Loan Requirements

As with all FHA loans, the FHA 203k loans require that you can show a steady income sufficient to cover the repayments on the full mortgage amount. The FHA 203k downpayment requirement for an owner-occupier is around 3% of the purchase and repair costs of the property.

While you do not need to have perfect credit for an FHA 203k loan, you need to be at least two years out of bankruptcy and three years past any foreclosure or deed-in-lieu, with a good recent payment history.

FHA 203k Loan Steps

1. Identify a potential fixer-upper - this means doing a full feasibility analysis, which you will need for your FHA 203k loan application later.
2. Sign a contract, which states that the buyer is seeking a loan under the FHA 203k program, and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender.
3. Contact an approved FHA 203k program lender and supply a detailed proposal, showing the scope of work to be done, including a detailed cost estimate on each repair or improvement of the project.
4. The FHA 203k program lender will appraise the future value of the property.
5. If the borrower passes the FHA 203k lender's credit-worthiness test, the FHA 203k loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the allowable closing costs. The amount of the FHA 203k loan will also include a contingency reserve of 10% to 20% of the total remodeling costs, which is used to cover any extra work not included in the original proposal.
6. At closing, the FHA 203k program lender will settle woth the vendor, and place the rest of the funds in escrow to pay for the repairs and improvements during the rehabilitation period.
7. The mortgage payments and remodeling begin after the FHA 203k loan closes. If the home cannot be occupied during construction, up to six months of mortgage payments can be added to the available funds, and drawn down monthly.
8. Escrowed funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of the job, 10% of each draw is held back; this money is paid after the lender determines their will be no liens on the property.
9. Mortgage payments continue as normal for the life of the FHA 203k loan.

For more information, visit FHA Loan Requirements.