If you've heard the term 203(k), FHA 203k, 203k loan or 203k renovation mortgage, then you're one step ahead of most Americans. This special product offering from HUD for fixing up housing stock has been around since the late 1970s, yet many real estate agents know nothing about it, and the public is in the dark.
Even if you've heard of the 203k, you may not know much - if anything - about it. That's all okay. We're here to let you know what it means and how it can help home buyers (and even sellers!).
What is the FHA 203k?
First of all, let's agree that a house someone else has lived in is most likely not going to be your style. Whether it's the paint, the carpet or a lack of modern efficiencies, since you didn't design it you're probably going to want to make some changes.
Next, let's consider this: we're all very busy. Work, play, family, volunteering, exercising and other activities keep us busy and pack our nights and weekends - unless you're working nights and weekends in which case you're packing your days. Either way, working on your new house with a DIY plan sounds great and can work out for some, most of us probably want to enjoy life and come home to the home we love, not the house we have to work on.
This is where a home improvement loan like the FHA 203k comes into play. This mortgage option helps you buy the house and roll the costs of professional remodeling right into the same loan. There's no hidden interest rate or additional mortgage you need to take out. You're not borrowing on a credit card ... you're adding value to the house by fixing it up so you can borrow against that after-improved value.
Since it's an FHA loan, you're required to have a 3.5% down payment. Yes, this includes the total of the home purchase and the renovations you're financing, but it's often a more popular option over scraping together the cash for DIY projects. Sure the cable shows make it look easy in an hour-long episode edited for television, but we all know it takes time, skill and work. Hiring a professional and financing the work over the life of the mortgage can help make some seriously amazing home improvements fit into your budget.
Watch the video below as Renovation Lending Director Joe Daly explains what the 203k loan is, in under 3 minutes.
FHA 203k Standard vs Limited
Within the 203k loan, you'll find 2 options - Standard and Limited. Let's look at what that means to you as a home buyer.
The 203k Standard can be used for adding rooms, raising a house and foundation, tearing a house down and rebuilding it, moving a house structural repairs and any repairs over $35,000. What you can’t do with an FHA 203k standard is luxury items such as swimming pools, barbecue pits, saunas, whirlpool bath tubs, but that holds true in both options. You can however fill in a swimming pool for safety reasons or if you just don’t want a pool.
The Standard requires a 203k Consultant to be part of the process.
The FHA 203k Limited is just as it sounds: it’s for limited repairs, such as cabinetry, counter tops, carpet, paint and any repairs below $35,000 that aren't structural.
Those are the basic differences between the Standard and Limited 203k loans.
Let's explore this myth. Many real estate agents have either had a bad experience with the 203k loan or have heard of a peer who has. Either way, the reputation of the 203k is that it's a difficult loan that blows up in home buyers' faces. While that may very well be someone's experience, it doesn't have to be that way.
Yes there can be more paperwork with the 203k, but mortgage loans already have a reputation for paperwork and many signatures. In reality, it's not much more and the paperwork is related to the home improvements you're financing, so it's tied together with you vision of your dream home.
Gathering construction bids can also be a big scary monster for some buyers. In reality, you need a bid for work no matter how you're paying for it, and AmeriFirst does NOT require multiple bids when your contractor is vetted with us. You can use the third-party tool Contractor Connection to help find qualified contractors, or you can have your desired company submit their information to our renovation department for vetting. It's not a painful process for you.
Want to hear from a home buyer on how the process works? Check out this video:
The 203k loan recently went through some changes. Check out what's changed with the FHA 203k loan to learn more.