Distressed properties are an investment opportunity for many people. Despite their low prices, however, these properties aren't available to every buyer out there. The problem is that because they need so many repairs, they are considered a huge risk as an investment, and therefore cause most lenders to walk away without even looking twice. There's a secret in the mortgage industry, though, that can help a lot more people get their hands on a home they can turn into their own. It's called the FHA 203k loan. This loan has similar rules and guidelines as a standard FHA loan, and it's backed by the government to reduce the risk to lenders. It gives borrowers a chance to buy a distressed property and then ask for the cost of repairs to be included in the loan, depending on the work that needs done.
The Basics of the FHA 203k Loan
The FHA 203k loan is an ideal option for the market conditions today. People aren't getting home equity loans left and right, and there are thousands of properties that have become victims of the market crash and need a little TLC. Rather than waiting for banks or investors to scoop them all up, the government is encouraging home owners to consider buying a distressed property and fixing it up themselves using the 203k loan. Depending on the type of home that a borrower is looking at, there are two different programs: standard and streamlined. Streamlined loans are for those homes that don't need structural work, and have a limit of $35,000 for total repair costs. Standard 203k loans are for structural issues and everything else. They also have the $35,000 limit on repairs, but total cost is also dependent on property values.
As with any FHA home loan, borrowers will still need:
- An appraisal
- 3-5% down payment
- Mortgage insurance
- 620 minimum credit score
- 41-45% debt-to-income ratio
Get the Loan That You Need
When you're looking to fix up a home with the FHA 203k program, there are a lot of requirements and details to go over. It's helpful if you can get a consultant that will walk you through the process and make sure that you're doing things right. They will be able to help you find lenders that offer this type of loan and make sure that you qualify and choose a good property for a long-term investment. The last thing that you want to do is pick something that needs more work than it's worth because you will wind up being in way over your head and that defeats the purpose of the entire program. It also puts you at serious risk for financial and other troubles. It's helpful to have someone on your side to assist you through this process.
Conventional mortgage refinance loans and renovation or construction loans are still available, but they are much more limited. The down payment is usually closer to 25% and the requirements for credit score and income are very high. The FHA program takes the option of a construction loan and makes it affordable for everyone. Not only does it help home owners, but it helps the real estate market, so everyone wins.
What's The Catch?
If you're like a lot of people, you see this information and you're skeptical. There's no way that the government could make something this easy. There's no way that they would, right? Wrong. The government has implemented this program as a way to get more homes into the hands of capable owners, revitalize neighborhoods, and get the real estate market back on track. There's no catch. It's not too good to be true. This is a real solution for home owners that can be helpful to a lot of people. You just have to get the facts about the complex FHA 203k loan and use that information to decide whether it's a smart move for you.