The primary key feature of the FHA 203 loan is this loan is really a combination home loan and home improvement loan. This loan bundles these two loans into one making this type of loan ideal for a homebuyer who wants to purchase an existing home that needs rehabilitation or repairs.
The 203K is a government loan administrated by the Federal Housing Administration (FHA) and has been around for a long time. The 203K loan decreased in popularity during the 1990’s but started again to increase popularity around 2005. This type of loan was created by the government with the intent of encouraging potential homebuyers to purchasing existing dwellings that were in need of rehabilitation and/or repair. Not only does the purchase of these existing dwellings rehabilitate and/or repair a building itself but it also rehabilitates an existing neighborhood. This type of dwelling is commonly referred to by realtors as a "fixer-upper".
If a potential home buyer is interested in purchasing an existing dwelling that is need of rehabilitation and/or repair, the 203K loan is definitely something they should learn more about. There are stipulations as to what type of dwelling qualifies for the 203K loan. Note with the FHA 203K, both the individual looking to purchase the dwelling and the dwelling itself must both meet set qualifications.
Frequently potential homebuyers walk away from an existing home that they would love to buy but fear the cost of the rehabilitation and/or repair. They walk away from the sale knowing they would either have to apply and be approved for a home improvement loan in addition to the loan for the home itself.
However, there are some home buyers who are so infatuated with the existing dwelling even though it is need of rehabilitation and/or repair they purchase it anyway and sink a great deal of their savings in to the dwelling. In addition to or instead of using their savings they may use credit card(s) with high interest (often double-digit) rates, or max out their credit cards. At this point the house has become a money pit and the homeowner may be looking to sell and will most likely take a significant loss on their overall investment. An FHA 203K loan could prevent this scenario.
A FHA 203K loan is perfect for an individual who is interested in purchasing a dwelling that is in need of rehabilitation and/or repair. Key features of the FHA loan include: a better interest rate than conventional loans, the amount of the down payment is lower than with a conventional loan, and many people that are not eligible for conventional loans due to past credit issues (including bankruptcy) can apply and be approved for this type of loan.
There are actually two different types of FHA 203K loans available, the Standard 203K loan and the Streamlined 203K loan. The primary difference between these loans is the rehabilitation and/or repair required and the amount needed for the loan. The Standard 203K loan is extensive work needed such as structural repairs required to the dwelling. The Streamlined 203K loan is for less extensive repair and and the cost of repairs is less than $35,000. The minimum amount that can be borrowed with a FHA 203K loan – the minimum amount is $5,000 and the maximum amount borrowed cannot be more than 100% of the value of the home when repairs are completed.
There are many realtors who actually discourage potential buyers from applying for a 203K loan for several reasons. Such as they are inexperienced with this type of loan, have heard negative stories from other realtors on this loan process, are aware the process of applying and approval process for a 203k loan can be significantly longer than with a conventional loan. Another downside from the realtor’s point of view is that a 203K loan cannot be pre-approved like a conventional loan.
However, for an individual that do make the decision to purchase a “fixer-upper”, 203K loan can be a great deal because these buyers most likely can qualify to purchase a much larger home than they could afford if they purchased a home is pristine condition. Many people also feel a great deal of satisfaction and a sense of accomplishment as they repair and/or rehab a dwelling where they will live.