A 203K loan is a U.S. government loan managed by the Federal Housing Administration (FHA), which falls under the Department of Housing and Urban Development (HUD). The 203K loan is unique because it bundles a loan for the purchase of an existing dwelling as well as for associated cost of renovations and/or repairs that are required to the existing dwelling. This type of loan used is to encourage potential home buyers to purchase an existing dwelling in an existing neighborhood rather than build a home in a new neighborhood. Many people refer to these existing dwellings in need of renovation and/or repair a "fixer upper" or a "handyman’s special". By purchasing an existing dwelling in an existing neighborhood it not only improves the look of the dwelling itself but the look of the existing neighborhood as well.
Properties that are deemed eligible for 203K loans are single family to four family dwellings that have been completed for a minimum of 1 year. The individual(s) purchasing the home must also make this dwelling their primary residence.
There are actually two types of 203K loans –the standard 203K loan and the streamline 203K loan. The difference between the two types of loans lies with the type of renovation and/or repair required to the dwelling, the timeframe it takes to complete the renovation and/or repairs to the dwelling, and the cost of the renovation and/or repairs to the dwelling. There is a specific list of items that do and do not qualify for each type of 203K loan. The minimum permitted loan amount of either type of 203K loan is $5,000. The maximum permitted loan amount of the 203K streamline loan is $35,000. The maximum permitted loan amount for the regular 203K loan is 110% of the value of the property once the renovations and/or repairs have been completed.
For first time home buyers there are several benefits associated with a FHA 203K mortgage. Actually, even though 203K loans are available to both first time home buyers as well as repeat home buyers, statistically they are most often applied for by first time home buyers. This may very well be because it has become more difficult for first time home buyers to qualify for conventional mortgage loans. With a 203K loan, the first time home buyer can afford a fixer-upper home that is larger than what they could afford if they purchased a home that was in pristine condition. For the first time home buyer applying for a 203K loan, this type of loan does not have a minimum credit score, does not require a cash reserve, and does not require a housing history.
There are also several benefits for the repeat home buyer because with a 203K loan individual(s) that have filed for bankruptcy or have gone through foreclosure can apply and be approved for this loan. The interest rates and terms are better than with conventional loans and the required down payment is less than with conventional loans.
So what type of information does the first time homebuyer need to have in order to apply for a FHA 203K mortgage? Two years of continuous history of proof of income, credit report, and proof of assets. The buyer must be a U.S. citizen, meet the qualifications of permanent resident alien, or meet the qualifications of a non-permanent resident alien by having a valid social security number and be eligible to work in the U.S.
There are some realtors that discourage home buyers from applying for a FHA 203K mortgage, either because they have had a bad experience in the past or heard of a bad experience from another realtor. Realtors also do not like 203K mortgages because the home buyer cannot be pre-approved for a loan, and the application and approval process takes longer than a conventional loan.
When applying for a 203K loan make sure you are working with a lender who has experience with this type of loan. There is a great deal of complex paperwork that is associated with applying for this type of loan and working with someone who is not well versed in the process can cause significant delays. It will also require patience on the part of the individual(s) who are looking to purchase a dwelling, the application and approval process for the 203K loan is significantly longer than with a conventional loan.