In our previous blog we told you all about FHA loans and why people get them. You might think that, having such a similar name, the FHA 203(K) loan would attract the same type of home loan seeker. But the similar name and the fact that they’re government-insured is about all these two types of mortgage loans share, so we thought we’d better let you know how FHA 203(K) loans work.
What Is An FHA 203(K) Loan?
FHA loans are government-insured loans with the estimated renovation costs rolled directly into the mortgage that you get as you purchase the home. In this way, you don’t have to go through two separate loan processes, i.e. one as you purchase the house, and another for renovation projects. In this way, you pay closing costs only once. That also means you’ll only have one loan payment to make every month instead of two.
Why Do They Exist?
Sometimes a house is in a perfect location but requires extensive repair. Instead of simply letting a building collapse, a city (and the entire US government) has an interest in saving homes and improving neighborhoods. FHA 203(K) loans encourage people to take houses that are worth less and turn them into houses that are worth more. It’s a win win situation.
How Does It Work?
After you find the property, you’ll work with a HUD (United States Department of Housing and Urban Development) agent to assess what the home is currently worth and how much it is estimated to be worth once it is renovated. That amount becomes the approximate amount you’ll be asking for in a home loan, minus down payment. Repairs must begin within 30 days, and they must be completed within six months.
Your mortgage payment will be larger since you’re paying for both the property and the parts and labor in order to make it better. Part of the loan is set aside and drawn from as you pay contractors for the repairs.
What’s Covered in the Renovation?
There are two basic types of 203(K) loans. The first is a streamlined loan, which covers non-structural repairs and upgrades. This could be a kitchen renovation or reflooring the home. The other is a Regular 203(K) loan that can be used to fix foundations, put on a new roof, or fix it in some other structural way.
What isn’t covered? Usually it’s only luxury additions such as swimming pools that aren’t covered. We can let you know if your improvements qualify or not, so contact us with questions.
As with FHA loans, mortgage insurance will be a part of the FHA 203(K) loan. You will have to carry mortgage insurance on the loan for a minimum of 11 years, but it might be required for the entire duration of the loan. Also, because of the complexity of the loan, the paperwork required might take longer and incur additional fees.
FHA 203(K) loans are a great way to improve a good house and make one that’s in bad shape shine again. If you’re ready to make a property the most it can be, this home loan might be for you. Contact the Frederick Branch of Goldwater Bank today!