What is a 203k loan? A FHA 203k loan is a federally backed mortgage that allows homeowners to finance the cost of improvements into the mortgage versus paying for them out of pocket. In this video, I discuss the mortgage process in more detail and get you more details on how the fha renovation loan works.
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An FHA 203k loan allows you to borrow money, using only one loan, for both home improvement and a home purchase.
How does a 203k loan work?
The 203k loan is a type of home improvement loan program insured through the FHA that works by allowing home buyers the ability to finance the purchase and costs of upgrades through one single mortgage. The home is appraised with an “as-is” value and a “subject to” value based on the improvements being made.
Part of the process in doing a fha 203k loan is to get bids from licensed contractors of the work you are going to be completing as the appraiser will need these in order to come up with the “subject to” value (new value of the home with the improvements). FHA will then lend up to 110% of the value of that “subject to” value.
Can I do the repairs myself with a 203k loan?
In my experience, the answer is No. You have to have a licensed professional do the work and provide all of the documentation of the improvements. Even if you are a licensed contractor, my understanding is that fha will not allow you to do the work.
203k loan pros and cons – The pros of a 203k loan are that you are able to purchase with a minimal amount down and have the cost of the improvements financed into your loan so ideally you’re coming up with no money out of your pocket to do the renovation.
The cons of an fha 203k is that these loans typically take quite a bit longer to get approved and closed than traditional loans. Another downside is that if the improvements end up costing more money than what you have allotted or being able to get approved then either you have to limit the scope of your work or pay for it out of pocket. In addition, you have to use licensed contractors for all of your work which typically means you are paying a bit more for the work being completed (this is probably a good thing).
If you have additional questions about an fha loan or a 203k loan, please comment below or contact me directly and I’ll be happy to put you in touch with a professional who can guide you in the right direction.
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