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FHA 203K and the Alternatives

Your home is most likely the biggest purchase you’re going to make in your life. You want your home to not only be affordable and fit within your budget, but you also want it to be comfortable, functional and styled to your liking. If you find a home that’s in your desired location and within your budget but is in need of repairs, an FHA 203K loan could be exactly what you need to turn the property into your dream home.

What is an FHA 203K Loan?

An FHA 203K loan is a regular FHA loan, only the estimated costs to fix up the home are added into the total mortgage amount. As the borrower, you’ll receive one loan with one fixed monthly payment and you’ll only pay closing costs once. Instead of having to take out an additional loan for your home repairs, an FHA 203K loan allows you to wrap the cost of the repairs into your mortgage.

How to Qualify for an FHA 203K Loan

In order to qualify for an FHA 203K loan, you’ll need a minimum credit score of 640 plus a 3.5 percent down payment on the total amount of the loan (the purchase price plus the renovation costs). For example, if you want to purchase a home for $200,000 and estimate repairs costing an additional $15,000, you’ll need a down payment of 3.5 percent of $215,000, or $7,525.

Most lenders will also require your debt-to-income ratio is no more than 43 percent, which includes the new monthly payment on your mortgage and repairs. Also, your loan amount must not exceed the maximum amount set by the FHA, which is typically $417,500.

Types of FHA 203K Loans

The two types of FHA 203K loans include a regular loan and a streamlined loan. The type of loan you get will determine how much you can borrow for repairs. For the regular 203K loan, you can borrow either 110 percent of the estimated property value after you do the repairs or the current property value plus the costs of repairs, whichever is less. The minimum amount you can borrow for this type of loan is $5,000. For the streamlined version, you can borrow a maximum of $35,000. Streamlined FHA 203K loans are intended for homes that do not need structural repairs, only cosmetic changes. The only type of improvements that the loan won’t cover are luxury items – such as a swimming pool or tennis court.

Alternatives to FHA 403K Loans

While FHA 203K loans can be a great option, there are a few disadvantages to going that route. For starters, the paperwork is more intense which could mean extra time to close the loan. Interest rates are also slightly higher on 203K loans than they are on regular FHA loans. And finally, FHA loans require borrowers to pay mortgage insurance throughout the life of the loan. Since your total loan amount is the purchase price plus the cost of repairs, you’ll pay slightly more in mortgage insurance premiums than you would with a standard FHA loan for a lower amount.

If you decide an FHA 203K loan is not for you, there are other ways in which you can borrow money in order to make repairs on your home. You could consider a personal loan, you can save up your own money or borrow from a friend or family member, or you can wait a few years to do the repairs until you have equity in your home. Once you have equity, you can get a home equity loan, a home equity line of credit or look into cash-out refinancing, which allows you to refinance your home and take cash out in the process.

Whether you decide a traditional FHA loan or an FHA 203K loan is right for you, make sure to comparison shop different lenders in order to get the best interest rate and the best deal possible.

Sarah Brooks is a personal finance writer and editor currently living in Charlotte, NC. She is the Content Editor for LendingTree and holds a B.S. in Finance from Arizona State University, plus has been featured on a variety of personal finance websites and blogs. In her free time, she enjoys spending time with her husband and daughters, baking, and being outdoors.

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