What is the downside of FHA 203K Mortgages?

Posted on December 4th, 2012

What is the downside of FHA 203K Mortgages?

What is the downside of FHA 203K Mortgages?

First of all, if you are not familiar with the 203k FHA mortgage, it is a renovation loan program, which provides money to qualified individuals to renovate a home that they purchase. Many times the 203k FHA mortgage allows for renovations to a dwelling that otherwise would not qualify for a traditional loan.

Many buyers are not interested in building a new home, they are interested in purchasing an older style home that has character, interested in purchasing a home in an established neighborhood near their family, or interested in purchasing an existing home so their children can attend school in a particular district. Many times those looking to purchase an existing primary residence find that dwelling may have fallen into a state of disrepair for any number of reasons. Obviously, it would be great to find an existing residence that is perfect condition, but that does not often happen. Many potential buyers are scared of making a purchase because of defects with a property. The 203k FHA Mortgage allow for the purchase of a primary residence with the necessary funds to renovate it as well.

So, how does the 203k FHA mortgage work? Once a qualified individual purchases a primary residence, funds are held in escrow to pay for renovations to the purchased property.

Obviously, the 203k mortgage sounds like a great idea for people interested in purchasing an existing residence in need of renovation. For many it is difficult to get a mortgage to simply purchase a primary residence, this type of mortgage actually allows for money to do renovations. This may sound too good to be true to many buyers and with reason – beware there are downsides associated with the FHA 203k mortgage.

First of all not everyone qualifies for not everyone that applies for a loan with the FHA is qualified personally. There is a basic list of qualifications that an individual must meet in order to receive an FHA loan. In addition to the basic list of qualifications, there are also exact qualifications that can vary based on location. Another downside is the dwelling, in addition to the purchaser, must also qualify for this type of mortgage.

The time limit for the renovation work from beginning to end has a downside as well. The renovation work must start within 30 days after the loan has closed and the renovation work cannot exceed 6 months. Depending on the type of renovation that is required, weather can cause a delay in the renovation, a delay can occur when waiting on material, and there are numerous other issues, which can occur to cause a delay.

Not all types of renovations qualify under the 203k mortgage. Make sure to review the list of improvements that are eligible. The list is quite detailed and does not permit for luxury items. There are two types of 203k loans – the Standard 203k and the Streamlined 203k. The Standard 203k is more complicated renovations – those renovations that deal with structural changes, the cost is over $35,000, renovations that prohibit occupation while the work is being done, etc. The Streamlined 203k is for renovation projects that are less extensive, do not require structural renovation, and do not exceed $35,000. There are also other stipulations associated with 203k mortgages as well. Therefore, a very possible downside associated with the 203k FHA mortgage is finding out that the renovations required for your home is not on the list of acceptable renovation work.

A downside associated with this type of loan as well is the interest rate. The interest rates on a FHA 203k mortgage loan are higher than other types of FHA loans. Depending on what part of the country you are looking to purchase your primary residence and apply for a 203k mortgage, there may be only a few lenders to choose from in your area.

Another possible downside is dealing with an inexperienced FHA 203k leader because they can cause delays. It is important you make sure you select a lender who has dealt with the complex and enormous amount of paperwork required for this type of mortgage on a regular basis. Dealing with an experienced lender and prepare you properly, anticipate problems, and avoid delays.

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