Are you interested in getting an FHA 203k loan for a fixer-upper that you have your eye on? If so, here are some things you need to know about moving forward.
You Can Secure Repair Costs With The Loan
What makes an FHA 203k loan so unique is that it allows you to include all of the costs of repairs into your mortgage. If you wanted to get a cheap home that requires a bit of work, you would normally just be able to secure the cost of the home with a traditional mortgage. All of the costs for repairs would need to come out of your own pocket, which you may not be able to afford.
Your Credit Score Makes A Difference
Your credit score will actually make a big difference with how much money you give as a down payment for an FHA 203k loan. At a bare minimum, the down payment with a 580 or higher credit score is going to be 3.5%. The minimum increases to 10% if your credit score is above 500 and less than 580.
One thing to keep in mind is that the down payment is based on the total price for the home and the money you are requesting for repairs. This is different from a conventional loan, which is based only on the price of the home. Make sure you have a good understanding of the repair costs and the down payment requirements when looking at homes to know if you can afford the home.
Your Contractor Must Make Repairs
Many people who are quite handy assume that they can use an FHA 203k loan to secure the money they need to repair the home and then save money by doing the repairs on their own. Unfortunately, this is not possible with this type of rehab loan. The home will still be a bank-owned property until the mortgage is paid off, and you are able to secure the rehab loan because it is assumed that the repairs will be done properly and the value of the home will increase. This is why FHA 203k rehab loans require a licensed contractor to do the repair work for you. If not, there is no guarantee that the homeowner will do the repairs correctly and to code, potentially causing a big problem for the lender if they need to take back possession of the home.
Contact a lender in your area for more information on rehab loans.