Overview of the FHA 203(k) Loan

Overview of the FHA 203(k) Loan
February 15, 2020 Steven Reno Saenger
In Blog, Steven Reno Saenger

Imagine finding the perfect home to purchase for $200,000 but it needs a minimum of $20,000 in repairs to make it habitable and safe. You could purchase this home and move in until you can finance the improvements separately or you could use the 203(k) loan.

What is a 203(k) loan?

The FHA 203(k) loan is a renovation loan. This loan funds the costs of purchasing a home and rolls the renovation costs into the mortgage. The 203(k) loans are insured by the Federal Housing Administration and typically offer more lenient qualification requirements than other renovation loans.

Types of FHA 203(k) Loans

The two types of 203(k) loans are the limited option and the standard. With each type, a 203 (k) refinance option is available for current homeowners. The limited loan provides up to approximately $35,000 for renovations with no major structural repairs allowed. The standard loan requires renovations to cost at least $5,000. However, major structural repairs are allowed with the standard loan and a HUD consultant is required to be hired in order to oversee the renovation process.

FHA 203(k) Qualification Guidelines

With the more lenient qualification requirements than a conventional mortgage, the 203(k) still has to follow the FHA loan limits. The first qualification guideline is the credit score. Your credit score needs to be at least 500 to qualify and some lenders may have a higher minimum. The second qualification guideline is the down payment. If your credit score is 580 or higher then your minimum down payment is 3.5%. If your score is between 500 and 579, your minimum down payment is 10%. Depending on your state there may be down payment assistance options for you. The third qualification guideline is the max loan amount. The FHA loan limit is different per where you live, but is generally capped at $337,760 for low cost counties and $765,600 for high-cost counties. The fourth loan qualification guideline is foreclosure. If you have foreclosed on a home within the past three years, in most cases this will prevent you from qualifying for an FHA loan.

Overall, if you are trying to buy and fix-up a house or if you are trying to fix the home you currently live in, the FHA 203(k) mortgage may be the perfect option for you because of the low minimum down payment, low credit score requirements, lower interest rate, and it covers your mortgage payment even if your home is uninhabitable during the renovation period.

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