The 203(k) loan is an all-in-one home loan endorsed by the FHA (Federal Housing Administration) under the Department of HUD (Housing and Urban Development). If you wish to buy a home that needs a lot of repairs, you can fund both the purchase and remodeling costs using the 203(k) loan. This loan program was initiated by the FHA to drive up the sales of broken houses and help moderate or low-income families buy their own homes.
Generally you will not be approved for a traditional loan on a property that needs a lot of repairs. Because most lenders refuse loans for purchase of broken homes, the FHA initiated the 203(k) program.
The loan includes purchase costs, refinancing, repair expenses, and home improvement costs. You need to make a low down payment of a 3.5 percent on the principal amount. The total cost covered by the loan sums up to nearly 110 percent of the property including the improvements.
The main aim of this loan is to increase property ownership opportunities for families with low incomes. It focuses on those homes that require repairs and rehabilitation.
It is a great solution for first-time buyers who wish to buy foreclosed properties or government-owned properties. These loans are available at low interest rates and flexible terms of payment. They do not have rigid eligibility criteria, which makes it appealing to buyers from all classes of the society, who have varying credit scores.
Typically, most mortgage loans are provided only if the property is in good shape and has an adequately good market value. If you wish to purchase a home that requires repairs, the lender would insist that you fix up the home before providing the mortgage loan.
Repair costs for heavily damaged houses can be quite expensive. You cannot proceed with the rehabilitation before you purchase the house. Initially, a buyer had to acquire a housing loan to purchase a property, another loan to cover rehabilitation costs, and a new mortgage to refinance the existing loans if required. This entire process could deplete a buyer’s savings for long periods of time.
The FHA 203(k) program was initiated to aid this problem and combine all the costs in a single loan. The interest rates can be fixed or adjustable and exist for a long term when you can make monthly payments to clear the debt. The loan is provided on the basis of all the costs of purchase and rehabilitation including manual labor and materials.
The loan can be used for property purchase. After the seller is paid, the rest of the funds are added to an escrow account from which you can pay the contractor for the improvements.
You cannot buy just any property and expect to be approved for an FHA 203(k) loan. There are certain factors that count for the loan approval process that may prove useful to you on your property search. Ideally, FHA 203(k) loans are provided for one-four unit homes that are at least a year old. When you use the rehabilitation loan, you can convert your single unit homes into two-, three- or four- unit homes. Similarly, you can also reduce the number of units in your home.
The eligibility criteria for the 203(k) loan are given below.
- The loan must only be used to rehabilitate residential property.
- The property should not have more than a quarter of its total floor area involved for commercial use.
- Commercial use of the property must not be a hazard to the health of the residents.
Depending on your necessities, you can use the loan in three ways. The obvious choice would be to finance the purchase and rehabilitation costs of a broken property. You could choose to purchase a home at a different site and move it to a new foundation. Then you could use the remaining loan amount to rehabilitate the unit. You could use this loan to refinance an existing mortgage loan and also rehabilitate your home.
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