As the housing market steadily bounces back, many homebuyers may be considering 203(K) loans to help purchase fixer upper homes. A 203(K) loan not only makes such a purchase possible, but also can make a project like an addition or a remodeled kitchen economically feasible for someone who doesn’t have a few extra thousand dollars lying around.
In this blog, I want to give you a good idea of what this loan is and what it can mean to a homebuyer or current homeowner.
The 203(K) is a specific type of mortgage through the Federal Housing Administration (FHA) that is geared toward homebuyers and homeowners who are looking to improve their home with repairs or upgrades. The funds can be easily and quickly accessed to pay for property repairs or improvements, including those identified by a home inspector or an FHA approved appraiser. There are two types of 203(K) loans to meet different needs.
The streamlined 203(K) is designed primarily for nominal repairs, such as new carpet, painting or replacing windows. These loans are restricted to a $35,000 renovation budget and can include no structural work.
The traditional 203(K) is intended for structural repairs and is limited based on that particular state/county lending limit. In Ohio’s Mahoning County, for example, applicants can be eligible for up to $271,050 with a 203(K). This is somewhat of a quasi-construction loan, which borrowers can use for such projects as roof replacement, knocking down load-bearing walls or creating additional living space.
While this might not seem much different from a traditional loan, the 203(K) can actually be a Godsend for a homebuyer looking to get a deal on a fixer upper home but doesn’t have the cash to buy it outright. Unlike a regular loan, the 203(K) doesn’t require the home to be in average condition because it looks at the property as if the work is already completed.
So, let’s say you’re looking at a foreclosure property in a $200,000 neighborhood in Mahoning County. That property is selling for $100,000 and you decide you’re going to put $50,000 worth of work into it. You rehab it and bring it back to life with that $50,000, and now it’s appraising at $175,000. You can’t do that with a traditional loan because of the average condition prerequisite “prior to closing”.
But consider the possibilities. Rather than waiting to save $150,000 to make those improvements, this loan will get you there faster and will make it much easier to manage the cost. For that $50,000, you’d only be looking at a monthly payment of a few hundred dollars.
Of course, there are stipulations. The home being improved must be at least one year old and must be the buyer’s primary residence. The cost of the rehabilitation must be at least $5,000, and the buyer must pass a credit check, have steady income as well as the financial reserves to make the monthly mortgage payment.
Next time, we’ll take a closer look about what you need to know to pull the trigger on one of these loans, and we’ll dispel some of the myths that might make you hesitant to take one out. For more information, contact our office at www.goktoday.com.