If your dream home is a fixer-upper, but cash is tight, a 203 (k) program offered by the Federal Housing Administration could make ownership a reality.
Known as FHA Section 203(k) insurance, the program allows buyers to finance the purchase of a distressed property and the cost of renovations through a single loan with one closing. A homeowner also may refinance and renovate a property within this program. Brokers must be approved by the FHA to offer these loans. Before meeting with a lender, the buyer must have a detailed work plan and a bid from an approved contractor. The lender will base the final appraised value of the property on the house plus the expected improvements. FHA establishes caps on the home values they will lend upon, which you can look up here.
An advantage to the FHA 203(k) is that borrowers can put as little as 3.5 percent down on a property. In the case of a conventional mortgage loan, if the borrower puts less than 20 percent down, private mortgage insurance (PMI) is required to cover the higher risk of default. Conventional loans on properties requiring rehabilitation are difficult to get with less than 20 percent down since PMI insurance is hard to obtain on this type of purchase. PMI can be obtained with a FHA 203(k) and the insurance is financed into the loan.
The FHA 203(k) program has two types: standard and limited. With the standard type, the house must be at least a year old and need a minimum of $5,000 in renovations. Borrowers may finance up to 110 percent of the expected appraised value after renovation. The loan will cover rebuilding the entire house as long as the foundation is intact. The money can be used to fix or remove a pool, but not to add one. The limited program is for homes that require less extensive renovations. This loan is more commonly used for repairs to roofs, gutters, HVAC systems and flooring. Both types of loans require repairs to begin within 30 days of closing and be completed within six months.
Read more about 203(k) loans at the FHA webpage for the program.
Related – How to Accommodate FHA Home Buyers