The FHA 203(k) loan is simply an extension of the regular FHA mortgage program. The loan is backed by the federal government, which provides two big advantages:
The additional benefit of the 203k loan over regular FHA loans is that it allows you to take out a single loan to finance both the purchase and renovation of a property, giving you the opportunity to build your dream home with minimal money down.
A 203k loan can be used for one of two purposes:
The maximum loan amount is determined by FHA mortgage loan limits for your area, and the minimum repair cost is $5,000. But as opposed to a conventional loan, in which your mortgage is limited to the current appraisal value of the property, a 203k loan bases the mortgage amount on the lesser of the following:
The product enables you to purchase a property that you otherwise might not be able to take out a mortgage on because the 203(k) loan factors in the value of the improvements to be made. It also allows you to do so with a down payment as low as 3.5 percent, which can be especially helpful for first-time homebuyers who often don’t have as much cash to bring to the table.
Available renovations include all the way from small improvements like kitchen appliance upgrades to major projects like completely tearing down and rebuilding the house. Also, the work must be done by a contractor. You are not allowed to do any of the work yourself (though there is an exception to this rule for people who have the skills to do it).
A 203k loan is available to anyone who meets the eligibility requirements and is looking to renovate a home. It’s often appealing to first-time homebuyers, who are generally younger and therefore less likely to have the cash necessary for either a conventional mortgage or to fund the renovations themselves. But there is no requirement that you have to be a first-time homebuyer. The program can also be used to finance either the purchase of a home in need of renovation or to refinance an existing mortgage in order to update your current home.
Take a look at our checklist to see the basic documents you’ll need to apply.