Before an individual decides to use a 203K loan from the FHA to finance their new home purchase, they should take a moment understand the fees and closing costs that are associated with this type of loan. Like virtually every mortgage out there, an individual will find themselves responsible for a number of different closing costs including escrow, title, attorney, lender, and recording fees. In addition to these costs, there are also some other fees that an individual will need to plan for.
The first of these fees is what is known as a contingency reserve. To put it simply, the more complicated the renovation project is going to be on a property, the greater the chance that there are going to be unexpected expenses and cost overruns. The contingency reserve is built-in to cover these overruns and will run somewhere between 10% and 20% of the estimated costs of the project, depending on exactly what is being done. The good news is that if the project manages to stay on track and on budget, the contingency reserve can be used to make additional improvements or can be used to pay down the original loan amount.
It will be necessary for an individual to have inspections done and pay for title updates when using an FHA 203K loan to pay for their new home. An inspection is necessary to ensure that there are not additional liens on the property and that the work has been completed. Fortunately, an inspection by a qualified appraiser or consultant only costs between $150 and $250 on average. Likewise, title updates are very affordable and typically run right around $50.
Because a 203K loan is designed specifically to make improvements and repairs on a home, there is a good chance that an individual might find themselves living in what is basically a construction site until the improvements have been completed. While some individuals may not mind this terribly, there is the option for individuals who have gotten the Full 203K loan to finance up to six months of their mortgage payments. Aside from the inconvenience of living in a home that is under construction, there's also the fact that the progress of the project may be significantly slowed down if a person is living there while work is being done. Of course, it is important to keep in mind that financing payments, while it will allow a person to put off moving in until the work is been completed, will also add additional money to their loan.
Large projects may require an individual to pay architectural or engineering fees in addition to the permits that are required in order to renovate a property. It is possible for a person to finance all of these fees and permits into their loan. It will also be necessary for an individual to pay for a consultant when using a 203K loan to finance a home purchase. The consultant's role is to inspect completed work and review estimates. On average, an individual should expect to pay somewhere between $400 in the thousand dollars to these consultants, but the fees may be significantly higher if the cost of the project is over $100,000.
Like all FHA loans, a 203K loan comes with an origination fee. This fee is based on the total loan amount. One of the things that make this type of loan different from other FHA loans is that the repair portion of the loan is supplemental to the origination fee for the purchase price of the property.
Although the fees associated with a Full 203K loan and a Streamlined 203K loan are not unexpected or by any means exorbitant, it is important for an interested homebuyers taken them into account when it comes to planning for their closing costs and monthly mortgage payments. In spite of these fees, this type of loan is still incredibly attractive to individuals who are interested in purchasing a home and making immediate repairs and renovations in order to turn it into the home of their dreams.