Are you thinking of buying a home that may not pass a standard appraisal? In general, this would mean that you can’t get financing, but if you take advantage of the FHA 203K loan program, you may just have yourself a deal.
Just like the standard FHA loan, the FHA 203K loan has flexible underwriting guidelines and it only requires a 3.5% down payment. You can even receive the down payment in the form of gift funds from a relative or employer. This could mean that you don’t put any of your own money down and you qualify to receive up to 115% of the home’s after-improved value for the loan.
How does it work? Keep reading to find out more.
The FHA 203K Loan Helps You Rehab a Home
If you find a home that has issues that won’t allow it to pass an appraisal, such as foundation, roofing, or just general living condition issues, you can turn to the FHA 203K loan. This loan program will give you the funds needed to purchase the home (pay the seller) and pay for the rehab. You’ll have to cover the cost of the renovations that will bring the home up to FHA code first in order to proceed. If there is money left, you may be able to make cosmetic changes to the home with the remaining proceeds.
There are two FHA loans that you can choose from for this procedure, just know that both options do require at least a 3.5% down payment:
- FHA 203K streamline loan – This loan gives you the chance to make non-structural changes to a home as well as cosmetic changes. The most you can borrow above the purchase price is $35,000. You can handle most of the paperwork and work with the contractors yourself with this program.
- FHA 203K loan – The main FHA 203K loan doesn’t restrict how much money you can borrow to make changes to the home. You can borrow up to 115% of the value of the home after improvements, as according to the appraiser. You can also make structural changes with this loan. The main difference aside from the loan amount is the need to hire a loan consultant. This is a professional that oversees the entire process with the lender and the contractors for you.
Whether you choose the FHA 203K streamline or main FHA 203K loan, you only need that 3.5% down payment. Let’s say you buy a home for $100,000. You would need a $3,500 down payment. You could then borrow as much as is necessary to renovate the home, bringing it up to FHA code.
The Lender’s Role
Keep in mind that the lender is in charge of the funds in this situation. Once you close on the purchase, the lender keeps any remaining funds after paying the seller. The lender then distributes the funds as necessary based on the contract with the contractor.
The contractor must stick to their deadlines and complete the renovations as they promised in the contract. The lender will verify that the proper work is completed before they disburse the funds. If you have a full 203K with a loan consultant, the loan consultant will take over this duty for the lender.
If you have the 3.5% down payment for a home and you think you can find a contractor that can manage the work necessary within 6 months at a price you can afford, the 203K loan can be a great way to buy and renovate a home that you want.