If you are not familiar with an FHA 203K loan, there are some pro and cons you should be aware of. Let’s first take a quick look at what these loans are and what they are intended to do.
What is a 203K Loan?
The U.S. Department of Housing and Urban Development (HUD) defines these government-insured loans as insurance that enables the purchase or refinancing of a house, along with the rehabilitation of the home through one single mortgage. It may also be used for the rehab of an existing home.
What They Are Designed to Do
The 203K program section is designed to fill a need for homebuyers. Previously, when buying a home in need of repair, a homebuyer would have to get a mortgage. That can be complicated enough on its own. To get the improvement loan, homebuyers would then usually have to go through a costly process. FHA 203K loans are designed to streamline the process. It can also help people who may have little to no equity on their home, making a traditional cash out refinance impossible.
The Cons of an FHA 203K Loans
The opportunities for homeowners are so good with a 203K loan, the cons seem minimal, but there are restrictions. First of all, the value of the property has to be within the limits for an FHA mortgage in the area. The rehabilitation project must come to at least $5,000. The house being remodeled must also be at least one year old. No one likes going through the inconvenience of a home renovation but all of the hard work and hassle fade when the completed, fixed-up property is completed.
The types of home improvement projects the government allows are far from restricted. They include:
- Physical structural changes and reconstruction
- Modernization of the home
- Resolving health and safety issues
- Improving the home’s appearance
- Plumbing improvements
- Installation of a well and or septic system
- Roofing, gutters, and downspouts
- Flooring replacements and treatments
- Significant landscape work
- Improving accessibility for disabled residents
- Improved energy conservation
One of the biggest cons is that FHA 203K loan requirements can be a bit complicated. After all, it is a government-backed program. The good news is that there are lenders like Prospect Mortgage that can serve as your liaison in assisting you with acquiring a 203K loan where they clearly outline the FHA 203K loan eligibility requirements. They can also point you to even more innovative loan products.
The Pros of the 203K Program
There is a long list of very good reasons to look into an FHA 203K loan. Here’s a look at some of them.
- According to The Mortgage Reports, residents of all 50 states are 203K eligible.
- Because they are government insured, lenders feel more secure in approving them and that also results in overall lower interest rates.
- There are streamlined 203k programs that are even easier to apply for.
- These loans save borrowers both time and money by combining needed funding into one single mortgage.
- They can cover both the acquisition and rehab of properties without balloon payments.
- They can be used when refinancing.
- Lower down payments are needed.
- Longer repayment periods are available.
- It’s not necessary to get a second mortgage or incur other expensive debt like credit cards for remodeling needs.
- Covers a wide range of rehabilitation projects.
Many people believe that in today’s economy it may be impossible to get a home loan, home improvement loan or refinancing without having to save large down payments or pay high interest rates. While regulations have put more regulations on banks, there are financing alternatives, including government backed programs like the 203K loans.
If you are consider buying a fixer-upper or are looking to remodel your home without a second mortgage, look into the FHA 203K loan program. Like Forbes Magazine says, it just may be a gift from the government. That is something no one can afford to turn down.