A 203k loan is a type of home mortgage loan offered to people who want to fix up a home when they buy it. Whether it’s structurally unsound or just outdated, these loans offer attractive terms to help get homes the TLC they may not otherwise receive. The government backs these loans in hopes that run-down neighborhoods will start looking a lot more welcoming to outsiders and residents alike. See who it’s meant for and when to apply for one.
How the 203k Loan Works
While FHA loans set their minimum credit score at 580, the 203k loan wants to see scores of 640 or higher. If homeowners are applying at the time of purchase, they’ll need a minimum down payment of 3.5% for both the price of the home and the estimated cost of repairs. The loan will not be awarded for second homes or rental properties, but it can be used as a way to refinance an existing home that needs repair. The interest rates depend on the lender and the buyer’s financial standing but are generally far lower than standard home repair loans.
When to Apply for a Standard 203k Loan
A standard 203k loan doesn’t set any official monetary limits for the borrower. In fact, a home buyer could use a standard loan to construct a home almost entirely from scratch. As long as a tiny fraction of the original foundation is still on the property, it still qualifies for the standard 203k loan. If the borrower has to stay elsewhere while the repairs are being made, they have the option to borrow the first six months of their mortgage payments in addition to the price of the home and the repairs. Standard loans involve quite a lot of paperwork and underwriting, especially if buyers are buying an expensive home, but they’re usually the best options for properties that need a lot of attention.
When to Apply for a Streamlined 203k Loan
For homes that need less than $35,000 in repairs, there’s the streamlined 203k loan. The main advantage of a streamlined loan is that it’s faster and generally a lot easier to apply for than a standard loan. The interest rates for both standard and streamlined loans are an average of 1% higher than normal loans and neither will eliminate the need for private mortgage insurance if the homeowner puts down less than 20% of the total cost of the loan. Homeowners do have the option of paying a single mortgage payment that combines the repair costs and principal into one easy payment.
Odds and Ends
Homeowners will need to give an itemized list of repairs to the lender before their loan is approved, and they’ll also need to hire a qualified contractor to complete the repairs. (DIY home flippers will need to look elsewhere for financing.) The regulations for 203k loans are somewhat loose, so it’s important to check different lenders before choosing one. Some will charge additional fees with the 203k loan to protect themselves against default.
The 203k loan is known for giving the Woodlands homeowners a chance to improve their home at substantially lower interest rates than other types of financing. Homeowners can use a standard 203k loan for properties that need major work or a streamlined 203k loan for a home that primarily needs cosmetic or minor improvements. Each one comes with its own advantages for borrowers who want to give their home the makeover it deserves.