FHA 203k Loan
The Federal Housing Administration is a branch of the United States government that insures certain mortgage loans to make homeownership more affordable and accessible. These loans are known as FHA loans.
An FHA loan is available to borrowers with lower credit scores who may not otherwise qualify for a conventional mortgage. In exchange, the borrower can access more competitive interest rates and a lower down payment requirement. However, the property must also pass the FHA appraisal process. This involves an FHA appraiser evaluating the property to ensure it meets health and safety standards.
Some properties may not be move-in ready. You may find a home that qualifies for FHA loan financing, but some issues with the property will cost money to repair. The Federal Housing Administration also insures loans designed to combine the cost of a home with funds for renovations. This product is called an FHA 203(k) loan.
TrueWay Mortgage is a lending partner that can guide buyers interested in an FHA 203(k) loan through the qualification and application process. Our agents can explain everything you need to know about a 203 k loan, including the escrow account, loan limits, and mortgage insurance premiums.
What is an FHA 203k Loan?
This type of mortgage is an FHA loan that serves two purposes. The first purpose is to help the borrower afford to purchase a home. The second purpose is to finance renovations to make the house livable and safe.
This government-backed loan is available to many types of buyers, but it is specifically targeted at those with lower credit scores and incomes. Since the government insures the product, an FHA-approved lender can offer more favorable terms to the borrower, such as lower interest rates, more straightforward qualification standards, and a minor down payment requirement.
The total loan amount will cover the home's purchase price and renovation project's cost. If you were to try buying a home with significant renovation needs without this renovation loan, it may not pass the FHA appraisal, which is required for FHA loan approval.
It’s crucial to understand FHA loan limits for a 203 k loan. The home's total cost, which includes its future value, cannot exceed the local loan limits. The FHA mortgage limit in most counties is $524,255 for single-family homes. However, this may vary based on location.
Other costs involved in standard FHA loans or an existing mortgage will apply to 203(k) loans. For example, you will pay mortgage insurance premiums. Closing costs for the 203(k) loan will include escrow account fees, loan origination fees, transfer taxes, title search fees, and more. It is essential to consider all the costs of a 203(k) loan in addition to the loan amount itself.
TrueWay Mortgage is committed to helping buyers understand these loans and open more purchasing options. We can review things like mortgage insurance, maximum conforming loan amounts, how to use a rehab loan to fix health and safety hazards, and more.
How Does an FHA 203k Loan Work?
Understanding how an FHA 203(k) loan works is essential if you plan to buy a home. The total loan amount includes the purchase and renovation loans. For example, let’s say you find a home that costs $205,000, and you can put down $25,000. However, some essential repairs will cost roughly $7,000 after you buy the property.
Instead of absorbing this cost directly after moving in, you can apply for a slightly larger FHA 203(k) loan that includes funds for $7,000 worth of repairs. This will spread the cost out among your monthly payments while giving you the homestyle renovation loan you need.
This type of loan program offers more flexibility to buyers. With a standard FHA loan, you may be restricted from buying specific properties with repair needs. A mortgage that includes funds for repairs allows you to look at more homes and cover the costs of those renovations after buying one.
Estimating upgrade costs can be challenging, so what happens if you have unused funds or not enough money for the renovations? Unused funds can be applied to other relevant upgrades or pay the principal balance. If the repair cost overruns the amount included in your loan, you will need to cover those rehabilitation costs yourself.
Types of FHA 203k Loans
Even within the FHA 203(k) loan category, several options exist. The type of mortgage loan you apply for will depend on the extent of the repairs needed for the home to be livable and safe.
The two kinds of FHA 203(k) loans are standard and limited (formerly known as a streamline 203(k) mortgage). The standard 203(k) mortgage is used for significant renovations and structural repairs. A limited mortgage is typically used for roofing, appliances, or cosmetic repairs like new paint. Both types of loans can only be used to purchase a primary residence.
TrueWay Mortgage can help you distinguish between these two products to choose the right one for your home search. We can also review other loan products, such as a fixed rate mortgage, the Choicereno express loan, and what you can use loan proceeds for.
Standard FHA 203k Loan
A home that needs significant repairs or structural renovations is best suited for the standard version of this loan program. The minimum cost of the repairs must be $5,000. There is no maximum cost for renovations with a standard 203(k) loan.
This loan can finance potential structural repairs, including additions, crack remediation, replacements, and alterations for your primary residence. A limited loan can finance home improvements like kitchen upgrades, energy efficiency projects, appliance replacements, bathroom remodels, and new flooring.
Standard 203(k) loans are available for purchasing or refinancing homes. The FHA insures these options to ensure eligible families who meet FHA guidelines can afford things like energy conservation improvements and quality work from a state licensed contractor. An FHA approved consultant can help you understand everything about a standard loan to make major repairs.
Limited FHA 203k Loan
If the home you want needs minor improvements unrelated to the building’s structure, you could use a limited 203(k) mortgage. However, the maximum repair costs you can finance with this mortgage is $75,000.
The primary distinction from a standard loan is that the repairs must not be structural. You can still use this new loan to finance many cosmetic upgrades, like new roofing or paint. It can also provide funds for energy-efficient upgrades and appliance replacements. You are limited to non-structural repairs and $75,000 of financing for these project costs.
Benefits of an FHA 203k Loan
An FHA 203(k) loan comes with numerous benefits. If you qualify for the program, you can easily combine the cost of the home purchase and the renovations. Instead of being forced to find another home that meets the appraisal requirements, you can consider more homes by combining purchase and rehabilitation costs into one loan.
There are also flexible credit score requirements, so you can secure this loan even if you have a lower score. Lastly, one of the benefits of homeownership is the opportunity to improve a home’s value and sell it for a profit. FHA 203(k) loans immediately boost the property's value since you can immediately make upgrades.
This loan can also be used with an adjustable rate mortgage. If you utilize HUD programs, a HUD approved consultant can help you. FHA renovation loans are known for being more flexible than Fannie Mae HomeStyle loans. These loans make it possible to have a state licensed general contractor make repairs, and you can pay it off with your loan term instead of taking out a second mortgage.
One Loan for Purchase and Renovation
Having one loan makes life much simpler for a borrower. Paying for early renovations may require a second loan, such as a personal loan, with high interest rates. This would result in mortgage payments and personal loan payments every month. Families struggling to pay one mortgage payment may risk losing their homes.
When you combine the home's purchase price with renovation expenses into one loan, you are only responsible for one monthly payment after closing. This will make it easier to keep track of your budget. Personal loan interest rates are often much higher than FHA mortgage rates so you can save money on interest in the long run with just one FHA 203(k) loan.
Lower Down Payment Requirement
The FHA program was designed to incentivize homeownership for people who may struggle to qualify for conventional loan products. One of the advantages of FHA home loans is the lower down payment requirement.
With a traditional lender, you would need a down payment of at least 10% to be approved, even though the technical minimum down payment is 3%. FHA borrowers can pay as little as 3.5% upfront to afford their homes.
When you include the cost of renovations in the total loan amount, that 3.5% down payment is still far more affordable than other types of mortgages. This low down payment requirement means an FHA 203(k) mortgage is accessible to more borrowers.
Flexible Credit Requirements
Your credit history has a significant impact on your ability to borrow money. Lenders do not give away money unless they feel confident that they can get it back. Therefore, they will look at a borrower’s credit score to determine if the individual reliably pays back their debts.
A low score may prevent you from qualifying for many conventional mortgage programs. The typical lender will require a minimum score of 620 to approve financing. You will also need an eligible credit score to apply for a VA renovation loan (for veterans, active military service members, and surviving spouses) or a USDA renovation loan (for rural properties).
FHA 203(k) loans are available to borrowers with less-than-perfect credit scores. If you have a score of 580, you can still qualify for an FHA mortgage with a 3.5% down payment. However, your score could be as low as 500.
You may still qualify for FHA financing if you can cover a larger down payment of 10%. Either way, you can still buy and renovate a home with a lower credit score through FHA lenders. The loan requires proof you can pay back the debt. There aren’t income limits, either.
Why Choose TrueWay Mortgage for an FHA 203k Loan?
Finding the right lender is key to navigating the homebuying process strategically. At TrueWay Mortgage, we offer personalized guidance and a tailored approach to ensure every buyer gets what they need. We will discuss your needs first to understand your goals for buying and renovating a home.
Our team will help you navigate the process to finance and improve your home with an FHA 203(k) loan. We’ll point you in the right direction to get a cost estimate and explain criteria, such as income limits and a construction contract. Our agents can help you access the funds you need for major renovations.
TrueWay Mortgage has helped many borrowers access this type of financing, even with low credit scores or limited income. It is also recommended that you work with a licensed contractor on projects funded by this type of loan, and our team can connect you with potential contractors from our vast network.
Contact Sam and Anisha Mauldin
TrueWay Mortgage
Start Your FHA 203k Loan Journey Today
If you are ready to purchase and renovate a home with FHA 203(k) financing, consider working with TrueWay Mortgage today. You can view today’s rates with our quick quote tool, which will help you examine your budget. If you have questions about standard or limited 203(k) loans and what properties are eligible, we are happy to provide the answers.
Call us today at 404-962-0032 for a free TrueWay Mortgage lending expert consultation. Start your journey toward buying your next home the right way.