What is a 203k loan?
Whether you are looking to refinance your home in order to renovate it or to buy a fixer-upper and use additional funds from the loan to increase its value, a 203k loan is a great option. Section 203k is a type of FHA home renovation loan that includes not only the price of the home, but includes funds to cover the cost of renovations. This allows you to borrow money based on the future value of your home, allowing you to amortize the cost of the repairs and upgrades into your investment.
The 203k is a FHA loan with renovation feature. The major difference is that the costs that are estimated for your renovation will be held in an escrow account. You will be able to release funds to your construction team as the renovation milestones are met.
No matter if your home renovations are large or small, necessary or optional, a 203k loan allows the following benefits:
- The loan may be used for updating, modernization, or total renovation of your home.
- You are able to combine renovation costs and first mortgage with either fixed rate or adjustable rate FHA 203k mortgage.
- All repairs are done after closing the 203k loan.
- The loan amount is based on the appraised value of your home including the proposed renovations.
- A 3.5% down payment is all that is required for purchases.
- You have the ability to use a 203k loan for improvements on a refinance or purchase.
Standard 203k loan
A standard 203k loan can be used by homeowners or homebuyers who would like to finance a property that requires major renovations. With the standard 203k loan, you have the ability to get just one loan for the cost of your mortgage, along with the required repairs. There are no limitations on the repair funds that you are able to receive, however there are limits to FHA loans.
Repair types allowed:
- Major rehabilitation and/or structural repair
- Renovations that require detailed architectural drawings
- Major landscape work and site improvements *restrictions apply
- Elimination of safety or health hazards
- New addition construction
- Site amenity improvements, such as landscaping *restrictions apply
- Repair work that will require longer than 3 months or more than 2 payments per specialized contractor
More intensive paperwork is required for a standard 203k loan and you could live in the home anytime unless the municipality places restrictions as part of the permit. Although, you will be permitted to add up to 6 months of mortgage payments to the loan amount.
Streamline 203k loan
A streamline 203k loan requires less paperwork than a standard 203k loan. You are still able to refinance your home or buy a new one, and borrow the money you need for renovations while having just one monthly payment. When obtaining a streamline refinance loan, you will get a list of recommended repairs along with a bid from a contractor. There will be a timeframe in which all repairs must be completed for your final appraisal. Homeowners can finance up to $35,000 into their mortgage to repair, improve, or upgrade their home. Repair types allowed:
- Replace or repair existing HVAC systems
- Replace or repair roofs, including gutters and downspouts
- Replace or repair plumbing systems
- Update floor and/or flooring treatments
- Interior and/or exterior painting
- Update appliances
- Waterproof basement
- Home weatherization
- Door and/or window replacement
- Enhancing home accessibility
- Update home's electrical wiring
- Replace/repair home's exterior
- Make energy efficient improvements
- Installing a septic system or a well
When dealing with a property that is in need of modernization or repairs, homeowners often have to take out high interest home improvement loans. A streamline 203k loan allows the borrower a fixed or adjustable rate loan with straightforward terms.
203k loan requirements
If you're interested in buying a home that requires renovation work or would like to upgrade your current living space, you may wonder what the requirements are to qualify for a 203k loan.
Credit score
In order to qualify for a 203k loan, your minimum credit score should be 620. Maintaining your credit score is critical during the loan process. Be sure to monitor your credit score regularly.
Down Payment
FHA loans generally have a low down payment requirement. If your credit score is good, you may qualify for a 3.5% down payment for your 203k loan. However, the more money you are able to put down, the better your terms could be.
How do I know if my property is eligible for a 203k loan?
In order to use a 203k loan to finance your property, it must be a single-family dwelling. If it is a 1-4 unit home, such as a townhouse or detached home, it must have been completed for one year. For 1-4 building condos, you are only able to make improvements to the interior. Houses and modular units that are able to be moved to a designated property are eligible. You are also able to convert single units into 2-4 unit dwellings with a 203k loan
Pros and Cons of an FHA 203k Loan
Things to Consider
Before jumping feet first into a 203(k) loan, it's best to be prepared for a process that's more involved than a traditional mortgage. In addition to more paperwork and planning, here are a few things to keep on your radar.
You're on a timeline.
Regardless of which type of 203(k) loan you choose, renovations must be completed no more than 6 months after closing. This may mean keeping a close watch on all hired parties.
You need to know what you want.
Your plan will ultimately decide the size of the loan you need, so the planning must be done before you get final approval. In addition, renovations must begin within 30 days of closing, so everything should be set in place beforehand.
You will need help.
This might mean bringing on a 203k consultant, getting plans drawn, and having contractor bids in hand before getting the keys in hand. Also be aware, all changes must be up to code and contractors working on the property must be licensed and bonded.
The Pros of the 203(k) Loan
Streamlining the repayment process isn't the only reason why the 203(k) loan is an attractive option for new homebuyers and existing homeowners. Let's take a look at the long list of advantages.
Low down payment
Many homebuyers don't have the cash on hand to make a 20% down payment on a home, then pay for renovations after closing. Not only does the 203(k) loan bundle the cost of the mortgage and the cost of improvements, but it requires as little as 3.5% down.
Lower interest on renovations
Regular rehab loans are likely to have a larger interest rate and a shorter repayment period than what is offered with 203(k) loan. This could mean a renovation process with significantly less financial stress.
Equity could be yours at the onset
Depending on the home that you buy and the renovations you complete, you could have a significant amount of equity in your home shortly after moving in.
It's your house, your way
Instead of making due with the property decisions someone else has made, or waiting to save up cash to complete the renovations you're dying to make, the 203(k) loan allows you to make major changes as soon as the keys are handed over.
Tax savings could add up
For homeowners that used to use other means of payment -- like credit cards -- for home improvements, this is a much more tax-friendly option. That's because all renovation costs are bundled into the mortgage, allowing the interest paid on the entire amount to be tax deductible. Please consult your tax advisor.
How do I start the 203k loan process?
When you are applying for a 203k loan, there are more steps required than there are for a traditional mortgage or refinance loan. Here is a quick guide to help you get started.
- Speak with one of our Licensed Lending officers today to get a 203k loan pre-approval
- Work with a real estate to locate an eligible property
- Submit an offer on your desired property
- Obtain an inspection and estimates from reputable contractors
- Select a contractor and finalize your estimate
- Order an appraisal on your desired property.
- Stay in contact with your lender and contractor, ensuring all milestones are met on time
- Move into your dream home
If you would like more information refinancing to renovate your home or purchasing a fixer-upper and transforming it into your dream home, a loanDepot 203k loan is a smart option. Get in touch with one of our Licensed Lending Officers today! We are well equipped to match you with the perfect lending solution to meet your life goals.