How to Use the 203k Loan to Your Advantage

A 203k loan is a way for home buyers to both buy a home and fix it up without being subjected to outrageous interest rates. This is a specific type of FHA loan created to stimulate homeownership rates and bring attention to some of the nation's more decrepit neighborhoods. It takes a lot of gumption to buy a home in need of repairs, and the government would like to see more of that go-getter attitude. See how to use the 203k loan to your advantage, so you can end up in the home (and the block) of your dreams.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

How 203k Loans Work

A 203k loan isn't the same as a typical FHA loan, although they are granted through the same department. A regular FHA loan may be given to someone with a credit score as low as 580, but a 203k loan requires a score of 640 or above. Loans for an FHA are only given for homes that are move-in ready, but a home with a 203k loan does not need to meet this requirement. Buyers will need to come up with at least 3.5 percent of the cost of the home plus the cost of the repairs. So if the home costs $50,000 and the repairs are estimated at $30,000, then buyers would need to have at least $2,800 to start.

Types of 203k Home Loans

A typical FHA loan requires a lower credit score of 580, but a 203k loan will ask a little more of the borrower. Lenders typically require a credit score of 640 or higher for this type of financing. In addition, borrowers will need to have at least 3.5% of the total cost of the home plus the estimated costs of repairs as a down payment. So a $60,000 home that needs an estimated $40,000 worth of repairs will cost a buyer at least $3,500  down to buy the home. The home will also need to be the borrower's primary residence to qualify. A 203k home loan can also be used to refinance a home that's in major disrepair. Borrowers will have two options when it comes to the 203k loan: standard or streamline.

Standard 203k Loans

A standard 203k loan does not have any limits when it comes to how much a borrower can request from the lender. When it comes to types of homes available with the 203k loan, demolished homes may still qualify if a portion of the original foundation remains untouched. Standard loans also offer borrowers the option to borrow the first six months of their mortgage payments if they're unable to stay in the home until the repair work is completed. This loan is recommended for homes that are in need of many repairs.

Streamline 203k Loans

A streamlined loan is perfect for Liberty Hill homes that need less than $35,000 worth of repairs. For this type of financing. there is less paperwork, which can speed up the process for borrowers and eliminate confusion or delays for the borrower. Both streamlined and standard loans let the borrower combine the costs of their mortgage and the repairs into a single monthly payment, but homeowners will still be subject to private mortgage insurance.

Odds and Ends

Unlike tradition forms for home financing, both types of loans allow homeowners to pay for both the mortgage and the repair costs in one monthly payment. A 203k loan can be either fixed-rate or adjustable, and they can even be used to refinance a home that needs major repair work. While interest rates are far lower than a typical home repair loan, the rates on a 203k loan are higher than other standard loans.

All work must be done by a contractor, and the home cannot be used for anything but a primary residence. Owners need to hire a construction consultant to ensure that all rules and zoning regulations are being met. All repairs will need to listed and submitted before loan approval. Finally, buyers should be prepared to pay private mortgage insurance (an additional fee charged by the lender.)

A 203k loan is an excellent way to bring an old home back from the dead, which can be worth every penny of the 203k loan. However, there are more than a few practical considerations to note before deciding whether or not this option is right for you.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.