Renovate Your Current or Future Home With a 203(k) Loan

Man holding before and after pictures

Have you found that perfect home in a perfect location, but it needs a lot of work? You aren’t alone. Plenty of potential homeowners find themselves in a bind when they’re searching for a home. They might have found one that’s exactly what they’re looking for in terms of style, size, and location, but is less-than-ideal inside and/or out. Basically, it needs some work.

Not all homebuyers have the cash in-hand to put a down payment on a house and also fund extensive home repairs or upgrades.

So, what’s a homebuyer to do?

In some cases, an FHA-backed 203(k) loan may satisfy a homebuyer’s every need. A 203(k) loan is tailored for homebuyers who want to make upgrades or repairs to their home but don’t have the cash to pay out of pocket. It’s a helpful way to finance the purchase of a home, plus the cost of home improvements and upgrades.

A 203(k) loan is sometimes a nice option for homebuyers and homeowners who love everything about a home, but know it needs a little TLC. It can help people purchase a new home that’s tailored exactly to their specific wants and needs.

What Is a 203(k) Loan?

The Federal Housing Authority (FHA) guarantees 203(k) loans as a way to help homebuyers and homeowners finance renovations to a home in a simple way. The 203(k) loan allows a borrower to mortgage the purchase price of a home plus additional money to fund improvements to that home.

There are two types of 203(k) loans:

  • A Full 203(k) loan A great feature of the Full 203(k) loan is the amount is based on your home’s estimated appraised value after the improvements and not what it’s worth at the current time, giving you added cash flow for the improvements to be made. These repairs may be structural changes and additions.
  • A Streamline 203(k) is meant to handle smaller, non-structural projects $35,000 and under. This program is perfect for safety repairs and minor remodeling project.

The 203(k) loans can be used for the purchase and renovation for a new homebuyer or also the refinance and renovation by an existing homeowner. The great part about the loan is the value of the home itself plus the amount needed for upgrades and repairs will be financed under one loan, instead of having to take out a second loan for the upgrades that will come with a second payment and possibly a different interest rate. While the interest rate of a typical 203(k) loan might be about 1% higher than a non-reno mortgage alone, that could still be a better rate than you’d qualify for with a separate home improvement loan. This means there is only one closing; there is no requalifying after the work has been completed. The value was already given to the home with the repairs in mind.

What Can a 203(k) Loan Be Used For?

A 203(k) loan can be used for most home repairs and upgrades. The only main stipulations are:

  1. You must borrow at least $5,000 for Full 203(k). There is no minimum repair amount for Streamline 203(k).
  2. You need to be an owner or occupant of the home.

Investors and home flippers won’t qualify for a 203(k) loan. The loan program is approved for one- to four-unit properties, but owners of a townhome or condo may also qualify for interior projects and upgrades.

With a 203(k) loan, you can do necessary repairs and desired upgrades such as:

  • Structural fixes and/or reconstruction (for Full 203(k), not Streamline)
  • Replacement of HVAC, electrical and plumbing systems
  • Roofing, gutters, downspouts and other exterior improvements
  • Upgrades to modernize your home and make it more your style
  • Flooring upgrades of any kind

Part of the funds you borrow could also be used for temporary housing so you don’t have to live in a construction zone while the work is being completed. This could include money to cover rent or your existing mortgage, if you have one, for up to six months.

How Does a 203(k) Loan Work?

A 203(k) loan allows borrowers to basically roll in the cost of upgrades and repairs of their home into the main mortgage. The FHA backs the loan, and as such, there are some rules and regulations you have to follow when you utilize the program.

First, all your desired upgrades and improvements will have to be written out as part of the application process. Then, the contractors will need to be selected, and they, too, will have to fill out the proper paperwork and abide by the 203(k) loan’s requirements.

The money in your loan that’s dedicated to the home improvements will be set aside in an escrow account, and paid directly from your mortgage company to the contractors. That’s another nice feature about the 203(k) loan – you as the homeowner won’t have to write multiple checks or handle any of the billing concerns.

The other main requirement of a 203(k) loan is that all of the home improvement work must be completed within six months. This keeps all the contractors on a tight schedule, which will get you into your home – or living there without construction going on – as soon as possible.

Additional Benefits of a 203(k) Loan

Because the FHA guarantees 203(k) loans, homeowners have the ability to put as little as 3.5% as a down payment on the home upfront. This could help minimize the cash a homeowner has to spend out of pocket not only to purchase a home but also make significant improvements to that home.

Overall, a 203(k) loan can be a great option for current or future homeowners to finance the cost of their home and the cost of needed or wanted home improvements, upgrades, and renovations together in one simple monthly payment. It’s the type of loan that could do a lot of people good, as it reduces the amount of up-front cash that larger home improvement projects usually require. And, best of all, it gets you living in the home of your dreams, exactly how you envisioned, to its fullest potential, when you first set eyes on it.

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