FHA 203K Rehabilitation Loan
One of the quickest, though not the easiest, ways to build equity in a home is to buy a home in distress and rehab it. Investors often refer to this process and “fixing and flipping” a property. They buy distressed properties, bring them back to life and sell them quickly for a tidy profit. It’s a tried and true real estate investment strategy, but it’s not just for real estate investors. Individual homeowners can use the “fix it and flip it” strategy without actually flipping the property and the FHA 203k loan program makes this easier than ever.
What is an FHA 203K Loan?
Essentially, an FHA 203K loan is a government backed loan that allows you to include both the initial purchase price of the home as well as any renovation costs. You have one loan and one closing rather than a series of micro loans and one big loan.
As with other FHA loans, you are required to put down at least 3.5 percent of the total value of the loan. Other FHA requirements are also in effect. You will need a credit score of 640 or higher, a maximum debt-to-income ratio of less than 43 percent and the full loan amount cannot exceed the maximum FHA loan value cap for your area.
In addition to the typical paperwork that goes along with an FHA loan, you will be required to provide a detailed proposal covering the improvements you plan to make to your new home, a thorough cost estimate and a timeline for when those improvements will be completed.
Before the lender agrees to finance your purchase and proposed renovations, an appraiser will value the home as it is and give an estimate of the market value of the home after your proposed improvements are complete.
Streamlined or Traditional?
There are two forms of the FHA 203K loan: the streamlined and the traditional.
The streamlined FHA 203K loan is used to purchase and rehab homes that do not require structural repairs. Proposed repairs cannot exceed the $35,000 cap.
A traditional FHA 203K loan is used when structural repairs will be made. Generally, there is a $5,000 minimum for repairs and no cap.
Both forms of the FHA 203K loan require the homeowner to begin repairs within 30 days of close and all repairs to be completed within six months of close.
All forms of repair and rehabilitation are allowed with an FHA 203K loan with the exception of luxury items like saunas, swimming pools and other luxury additions.
The Downside of the FHA 203K
First of all, you are required to stick to your proposed schedule and cost estimate. This means that you can expect regular inspections of the work site, and that can be a hassle. Keep reading…
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