Whether you are looking to build your own house, buy a new one or refinance your current home, an FHA 203k loan may be able to help. This type of home loan is secured by the Federal Housing Administration (FHA), which means mortgage lenders are protected from financial strain if you stop repaying your loan. In exchange, lenders have more lenient qualification factors and appeal to more types of borrowers.
You may not know that the FHA also has home improvement loans designed to help buyers and existing homeowners pay for improvements, upgrades or repairs. The FHA 203k loan is not a home renovation grant, which means you must repay the money you use to make repairs.
An FHA 203k loan is a great option for those interested in buying a fixer upper. It allows you to finance the cost of the home and the estimated cost of repairs into one, easy-to-manage mortgage.
Home improvement loans like this are not just for purchasing a new house, but for refinancing your current mortgage as well. If you plan to make upgrades or improvements to your home, you may not have the money up-front. By refinancing your mortgage to a 203k loan, you can finance the cost of these upgrades and pay for them over time.
To qualify for refinancing through an FHA 203k loan, you must have purchased the home at least one year prior to refinancing.
Like other home improvement loans, the FHA 203k loan is designed for homeowners who plan to remain in the home after making improvements or repairs. So, you cannot sell or vacate the property right away. It also means that you cannot use this type of loan for investment properties.
Mortgage lenders will also check your credit score to ensure you are a responsible borrower. Most lenders require you to have a credit score of at least 620 to qualify for an FHA 203k loan.
In addition to qualifying for the mortgage loan, you must get an estimated cost of repairs. This number will be grouped into the purchase price of the home to arrive at a final, “all-in” price. FHA-approved lenders will determine if you are approved for the total all-in cost by examining the purchase price and the quotes for repairs.
To qualify for the FHA 203k loan, the estimated cost of repairs must be at least $5,000.
Some home improvement loans require you to use approved contractors for your desired repairs. The lender you choose should notify you if this is the case. You usually cannot do the repairs yourself (DIY) with the loan money unless you are qualified to do so.