Four FHA 203(k) Myths Busted
Paperwork. Time. Bids. Big Loans.
Our customers tell us these are obstacles that are keeping them from taking advantage of the FHA 203(k) loan for home improvements, renovations and repairs. Real estate agents often don't suggest this loan option to clients for the same reasons.
The 203(k) renovation loan allows you to buy and renovate a home, all with one loan. It can be a good choice if you don't have the resources for a large down payment (minimum 3.5% down) or money in the bank to cover your remodeling projects. The loan allows you to finance projects at a lower rate, without a new line of credit or a high-interest credit card.
Understanding the top four myths of the 203(k) can help you determine if this loan is right for you. And if you're trying to remodel a home, you shouldn't overlook its main benefit: the ability to roll the cost of needed structural repairs and desired improvements (carpet, paint!) into the life of the mortgage of this government-backed program.
Let's examine the top four myths of the 203(k) Loan:
Yes, there's a little more work involved with a 203(k) loan. The good news is that we’re loan specialists and we help people like you get into homes - with the loan and terms to fit your needs - every day. Our team stays current on government loan requirements and, along with their experience and focus on customer service, can walk you through each step of the application process - especially when it comes to getting the necessary paperwork together.*
We’ve heard the horror stories of 203(k) loans taking forever to close. Time frames including 60 days, 90 days or more have been tossed around. There could be several reasons for this. The bank handling the loan may not understand the difference between a Standard 203(k) and a Limited 203(k) mortgage (the Standard takes care of structural stuff; the Limited is more for smaller repairs and upgrades). Also, sometimes loans get hung up in the bid process. When looking for a lender, look for one with a network of qualified contractors who have done this work before. In short, the loan should not take significantly longer than any other loan to close. At AmeriFirst, we're closing this loan in 30-45 days, similiar to our other loan programs.
Some people are natural negotiators. For others, dealing with bids and finding the most appropriate contractor for the work isn't part of their skill set. At Amerifirst, we have strong relationships with certified contractors and will work with you during the bid process so you're not running around getting bids from several sources. We also have a dedicated Renovation Lending Department to help take care of the behind-the-scenes work that goes into this part of the process.
4. Big Loan.
Buying a house and borrowing more money for repairs goes against the advice of financial planners. For example, we hear many people say they don’t want to pay for the carpet for 30 years. A big benefit of the 203(k) is that you can borrow the funds you need based on what your house is expected to be worth after the renovation is complete. The loan is set up so that you are amortizing the cost of the repairs and upgrades into the investment. And you're gaining instant equity. If you buy a home for $60,000 that’s in a neighborhood of $100,000 homes, and put $20,000 worth of work into it, you’re now the owner of a more valuable home that you paid $80,000 to buy. You have $20,000 instant equity.
Whether it’s finding a great deal on a foreclosure, or working to improve your own home with a refinance, rolling the cost of the repairs and upgrades into the life of the home loan can help add value to the house.
Make sure you find a 203(k) specialist to help with this process. You want someone who's done these loans, who knows the government requirements and who knows certified contractors to get the work done.
*Ranked as one of the top FHA 203(k) providers in 2018 by the Department of Housing & Urban Development.
Check out the short video below for a look at why 203(k) loans get a bad image: