Finding The Right Loans

6 Things To Know About 203(K) Rehab Loans

18 June 2021

April George

If you are interested in purchasing a property that is in need of a lot of repairs in order to be livable and valuable, you are going to need something other than a traditional mortgage. You are going to need what is known as a rehab mortgage. There are various types of rehab mortgages. The Federal Housing Administration (FHA) backs up two different types of rehab loans, known as 203(k) renovation loans.

1. Limited 203(k) Is for Non-Structural Upgrades

There are two different sub-types of 203(k) renovation loans. A limited 203(k) loan is designed for repairs to a home that are non-structural in nature. These include many upgrades that one may make to a property, such as changing out the plumbing, electrical system, and flooring in a home. This type of loan can also cover things such as renovating a bathroom or kitchen. There are often caps to these types of loans.

2. Standard 203(k) Is for More Severe Damage

The second sub-type of 203(k) loans is a standard 203(k). A standard 203(k) is for homes that have suffered severe damage or that need lots of expensive and time-consuming repairs before they can be considered habitable. This type of loan often has a higher loan limit.

3. The Qualifications Are Lenient

When it comes to qualifying for either type of 203(k) loan with the FHA, the qualifications are generally not as stringent as they are for other loan times. That means that you can get a 203(k) loan with a less-than-stellar credit score and debt-to-income (DTI) ratio. The requirements for FHA backing are less competitive than they are for other loans. It is important to note that a lender can still be more stringent in their own screening process.

4. Low Down Payment

With a 203(k) loan, you will be required to place a down payment. That is true of all FHA-backed loans. The size of the down payment will depend on your credit score. The down payment is minimal in comparison to other loan types, which is just another way that 203(k) loans are more lenient and accessible.

5. Pay for the Home & Upgrades

With a 203(k) loan, you are going to be given two different amounts. The first portion of the loan is going to go towards the purchase of the property. This will be paid to the seller.

The second portion of the loan is the money you are being given to upgrade and fix the property. This money will go into an escrow account. Then your agent or lender will release money to pay the contractors as they complete the work to upgrade the home.

6. Potential to Increase Home's Value

With a 203(k) rehab mortgage, you have the opportunity to fix up a property. By fixing up the property, you have the opportunity to increase the value of the home, which means that your home should quickly be worth more than you paid for it, allowing you to build equity in the property.

If you want to buy a fixer-upper, one type of rehab loan you should consider is a 203(k) loan backed by the FHA. This loan has less stringent lending requirements and low down payment requirements and can be a great way to get the funds to fix up a property. Contact a lender that offers rehab loans to learn more.

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