Whether you love home repair projects or have your heart set on living in a specific neighborhood with limited home options, a 203k loan (also commonly referred to as a rehab loan) is one way to make your vision come to life. A 203k mortgage gives you the financing you need to both purchase the home and pay for the necessary repairs. Cosmetic and structural repairs are permitted.
A 203k loan is an excellent option for buyers who are short on cash or lack the credit to secure a separate renovation loan in addition to a mortgage. Check out some of the most important details you need to know about a 203k rehab loan and home mortgage services.
1. A 203k Loan Makes It Possible to Purchase Homes That Typically Fail Home Inspections
One of the most common caveats to purchasing a home that needs significant work is that they often fail conventional home inspections. For a traditional loan, your lender will require that the home be in a certain condition. If it isn't, the seller or you will need to pay for the repairs that are causing it to fail the inspection.
The 203k loan eradicates this issue and even gives you the money that you need to make sure a home is livable.
2. You Need Contractors Willing to Cooperate With the 203k Loan Process
Once you have a home in mind, you will need to submit bids for all of the projects that you want to complete. These bids must be extremely detailed and accurate; if the final cost of the project varies or if a bid doesn't accurately describe the project, this can put your financing in jeopardy or delay your loan's final approval.
Since the paperwork for a 203k rehab loan is so stringent, you must choose a professional contractor who has the necessary insurance and licenses. You can't have a handy friend or loved one complete the work. It is best to stick with a contractor who has experience completing 203k home renovations.
3. The Federal Housing Administration (FHA) Insures 203k Loans
The 203k loan is actually a type of FHA mortgage. Since the product is issued by a government entity, the requirements are much less stringent than those for conventional mortgages. Minimum credit scores vary slightly with each lender but generally fall between 580 and 640. Some lenders do specify a slightly higher score for the 203k mortgage.
Your required down payment is only 3.5 percent of your home's purchase price, and you are permitted to have a friend, family member, or non-profit community organization gift you the down payment.