Homes in need of repair or updating can be had on the cheap, and the fixes may not be very expensive at all.
For instance, a house potentially worth $250,000 may sell for just $200,000 when it needs only $20,000 in repairs. That leaves $30,000 in potential equity for a buyer with the initiative to manage the fixes.
According to real estate data website Realtytrac, the median home price in a “distressed” sale was 42 percent lower than the price netted in non-distressed situations. That’s a big discount.
The Federal Housing Administration’s (FHA) 203k loan allows buyers to finance the home and up to $35,000 in repairs with one loan.
It’s possible to have lower monthly payments and higher equity in your home the moment you move in, compared to your friends and neighbors.
Downsides of the 203k loan program
- Gain instant equity
- Deal with less competition to buy the home
- Gain valuable experience remodeling a home
Don’t be surprised if the lender requires you to send a bid back to the contractor two or three times for missing information.
You will also have to decide on the upgrades that are within your budget. That can be exciting, but also stressful. You’ll have to make decisions quickly to ensure the loan approval stays on track.
Go into the process expecting and embracing that fact. Don’t think that you’ll be the exception that closes the loan in fifteen days. Set realistic expectations with the seller!
Are you ready to tackle these relatively minor inconveniences to reap the benefits? Then a 203k loan is probably the right loan for you.
FHA 203k rehab loan FAQ
You must have at least a 580 credit score (though some lenders require 620-640); at least a 3.5% down payment based on purchase price plus repair costs; adequate income to repay the loan; not too much existing debt; and U.S. citizenship or lawful permanent residency. In addition, you must be purchasing a home you plan to live in.
First you will apply and get approved. Then you find a contractor, get repair bids, and determine your final loan amount including construction costs.
Next, the mortgage company has to underwrite and approve your loan. After that the loan can close, the contractor can start renovations, and the mortgage company will pay them as construction is completed.
The 203k loan covers the full purchase price of the home plus any eligible repairs (non-structural repairs for the “Limited 203k” program). For example, if the home price is $250,000 and $20,000 in repairs are needed, the new loan will be $270,000 plus a required contingency or “buffer” percentage.
You can borrow up to 110 percent of the property’s proposed future value, or the home price plus repair costs, whichever is less. But note that your total purchase price plus repair costs must still fall within FHA loan limits for the area. Look up your local limit here.
A 203k loan can be well worth the extra effort, especially if you can buy a home at a discount. For instance, a buyer pays $200,000 for a run-down home, but does $20,000 in repairs. Because the home is now in “turn-key” condition, it would be worth $240,000 on the open market. this page The buyer gains $20,000 in equity immediately. This scenario is not uncommon in today’s market.
No. These loans are only available to buyers who plan to live in the home for the foreseeable future. Yes, you are able to sell the home someday, but you can’t enter into the transaction knowing you will sell the house as soon as it’s fixed up.