When looking for a first house or a cozy retirement spot for mom and dad, many homebuyers think a fixer upper could be the way to go. After all, a little ingenuity, skill, and elbow grease can turn a ramshackle abode into a work of art. What some don't realize, however, is that many mortgage companies refuse to grant traditional mortgages for "uninhabitable" houses. Plus, home improvements can soar past the anticipated budget, making it difficult to meet mortgage payments. That's where government-backed FHA 203(k) loans can help.
Similar to a construction loan, an FHA 203(k) loan is a government-backed mortgage specifically designed to help buyers purchase and renovate out-of-shape houses. For example, if a buyer wants to make an offer on a house that needs major renovations in the kitchen and bathroom, he or she can apply for an FHA 203(k) loan to cover both the cost of the house and the estimated amount of the renovations.
FHA 203(k) loans come in two types - standard and streamlined. Standard FHA 203(k) loans cover structural repairs, the kind of construction work so significant that you cannot live in the home while it's ongoing. Streamlined loans, by contrast, help pay for cosmetic upgrades such as painting, flooring, and purchasing new exterior siding.
Qualifying property types include:
FHA 203(k) eligibility is partly determined by credit score. Lenders require a minimum score of 640. Prospective borrowers whose score falls below 640 but above 500 may still qualify for an FHA loan.
Down payment regulations are significantly lower than those for a regular mortgage. Just 3.5% down can get you an FHA 203(k) loan. Borrowers who opt to put down less than 20%, however, must pay the going rate for the Mortgage Insurance Premium.
Other requirements include holding a solid employment history, having no bankruptcies or foreclosures in the last three years, and making no late payments in the last year.
The upper limit borrowers can access on these loans varies according to location and number of units in the property.
The FHA makes it financially possible for you to buy and repair an inexpensive property, turning an out-of-condition building into a home you can be proud of. FHA 203(k) benefits include a low down payment, extra money for cosmetic or structural repairs, and the chance to choose an adjustable rate or a fixed-rate mortgage.
You can even borrow money to make the mortgage payments for the first six months.
An FHA 203(k) loan isn't for every buyer. But for many people, it can be the bridge to owning a charming, upcycled home.