Can You Afford To Buy A Distressed Home? With The FHA 203K Mortgage, The Answer Could Be Yes!
For decades, real estate investors have known that an excellent way to earn substantial profits is to purchase homes in need of repairs, do the work, and then rent or sell the renovated homes. Countless real estate reality shows about this process, often called house flipping, have helped to create more interest in the purchase and rehabilitation of these distressed or damaged homes. However, many private buyers lack the funds needed to purchase and renovate these homes for sale for their families to live in.
Owner-occupant buyers experience difficulty in buying distressed homes with most commonly used mortgages
This problem is compounded by the fact that most of the commonly used home loans, such as the FHA, VA, USDA Rural Development, and many fixed rate conventional loans require homes to meet specific condition and value guidelines before the loan can be approved. In fact, some of these loans require a special inspection and appraisal process that ensures the home meets current safety guidelines. But another, less commonly used home loan option can help private buyers get around this type of obstacle and succeed in purchasing and renovating a home than cannot meet those guidelines.
The FHA 203K home loan offers a convenient, affordable way to purchase and renovate a home
Unlike other loans with specific condition requirements, the FHA 203K home loan, guaranteed by the Federal Housing Authority, gives the home buyer an opportunity to purchase a home with condition, size, cosmetic, or other issues and finance both the property and the repairs in just one loan. Available through qualified local banks and lenders, the application process for this option is similar to that of the perennially popular FHA home loan.
But there are some critical differences that the applicant should understand before applying, such as:
- the repairs must cost at least $5,000 and be able to be completed within a six month time frame
- the total amount of the mortgage, including both the cost of the property and the amount spent on repairs must not exceed 110 percent of the amount the home is expected to appraise for when complete
- the closing time can be much longer than other loan types, sometimes as long as six months
- both adjustable and fixed-rate FHA 203K loans are available
- mortgage insurance premiums will apply
- all bids submitted and work performed must be done by professional contractors who meet FHA requirements
- there are two types of 203K home loans available including the streamlined option for limited repair scopes or the more in-depth standard option
- down payments can be as low as 3.5 percent
As with the regular FHA loan, buyers who have less than optimal credit scores can be approved, although they may be required to have a larger down payment.
Additional Features of the FHA 203K Home Loan
Although the FHA 203K home loan can only be used by an owner-occupant or some types of non-profits, they can be used to purchase a multi-family residence having up to four units. Homes that are being changed from single family to a a multi-unit property with up to four units can also qualify.
Condominium and town home buyers can also use this loan, although it will only cover interior improvements on these units. In addition, the FHA 203K home mortgage can also be used to purchase some types of modular housing, or other homes that are constructed off-site and then moved to a property.
Buyers may also be able to include up to six months of mortgage or rent payments in the loan, to ensure that they have a safe place to live while the home is being repaired or renovated.
To find out more about the FHA 203K home loan and get a better understanding of how it can help you purchase and renovate a distressed home, take time to discuss the matter with your real estate professional. They will be able to help you determine if the loan is a good option for your situation as well as help you find qualified contractors and a lender to assist you with the process.
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