Helping You Win The Real Estate Game

What is an FHA 203k loan?

Joseph Brown

Joseph Brown

Joseph is a licensed residential real estate professional serving the Flathead Valley in Montana. Cutting his real estate "teeth" in commercial real estate with a Fortune 500 company coupled with serving as a police officer for nearly a decade, Joseph brings a unique and professional approach, perspective, and skill set to real estate and investments.

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FHA 203k loan
FHA 203k loans, or rehab loans, are a great way to find the ugly duckling house in a tough seller's market.

When all else fails...an FHA 203k loan may be the answer.

As it gets harder and harder to find a decent house that’s available in this market, buyers need to start getting more creative to make things work. as most buyers are starting to find out right now, most decent homes that are in good shape and desirable areas, are selling quickly. These homes have a lot of competition from other buyers and generally sell at or above market value. If you find yourself constantly competing, and losing out, against multiple offers/buyers, it may be time to work a different strategy.

We discussed last week about some strategies that buyers can utilize to help find a home in this market; however, today we’re going to discuss another strategy that buyers can look at to help increase the quantity of properties that buyers can look at on the market. 

One strategy that most buyers don’t utilize enough is to look at homes that maybe aren’t as desirable, need a little more elbow grease, or some extra love from a contractor to become attractive (or habitable) for buyers to want to live in.

Most buyers will shy away from these types of homes because they don’t have the cash on hand available to make repairs after the close of escrow. Most buyers feel uncomfortable about having to use cash after purchasing a home because they have other things you need to worry about such as getting new furniture or decorating and all of those other fun things that you do once you move into a new home. Also, the last thing that most buyers want to do after closing on a home is then securing new financing (generally at a less attractive rate that what they just purchased at) to finance construction and repairs on the home

FHA 203k loan
The interim acquisition and improvement loans often have relatively high interest rates, short repayment terms and a balloon payment. Ugh. That sounds awful.

Therefore most buyers will shy away from properties that need some TLC. However, most buyers are starting to find out that beggars cannot be choosers when they are shopping in a seller’s market like we are in today.

So what is a good strategy that’ll enable buyers to go after some of these properties without having to use savings or extra cash in the bank after close of escrow to buy these properties that need a little more TLC?

The answer is the FHA 203(k) loan. Section 203(k) insurance enables home buyers and homeowners to finance the purchase of a home (or refinancing) along with the subsequent cost of rehabilitation through one singular mortgage to finance the overall rehab of the home they’re buying or refinancing. 

What this means to homebuyers is that homes that used to be undesirable, whether the homes were outdated and/or in need of serious repair, can be purchased with one single loan that can include the cost of the repairs and/or modernization. What this translates to home buyers as well, is that it saves them a lot of time in the process of only having to obtain one loan on the front end while purchasing the home originally.

FHA 203k loan
FHA 203(k) rehab mortgage insurance, enables buyers to finance all costs (including modernization and rehab) into one loan package when they buy the home!

In a market where there is limited inventory and all the desirable inventory is selling quickly, FHA 203k gives buyers another tool in their toolkit. It allow buyers to start expanding options in their search to look at homes that originally they may have passed on because it required more work or repairs that they were not willing to do themselves or could not afford after the purchase of the home.

Per HUD we will discuss some of the requirements of this loan package and also some of the improvements that home buyers or borrowers can make when using this type of financing. However I would highly recommend that if this is something that you want to pursue seek the advice and counsel of a lender or bank as they will be able to better educate you about the process.

Straight from HUD’s FHA 203(k) rehab mortgage insurance page, here are the types of improvements that borrowers are eligible to be made using Section 203(k) financing:

  1. structural alterations and reconstruction
  2. modernization and improvements to the home’s function
  3. elimination of health and safety hazards
  4. changes that improve appearance and eliminate obsolescence
  5. reconditioning or replacing plumbing; installing a well and/or septic system
  6. adding or replacing roofing, gutters, and downspouts
  7. adding or replacing floors and/or floor treatments
  8. major landscape work and site improvements
  9. enhancing accessibility for a disabled person
  10. making energy conservation improvements

Bear in mind that HUD does require that homes financed under this program meet certain basic energy efficiency and structural standards. 

How does it work?

  1. Cost of rehabilitation must be at least $5,000
  2. Total value of the property has to be within the FHA mortgage limit for the area
  3. Value is determined by either a) the value of the property before rehab plus cost of rehab, or b) 110% of appraised value of property after rehab, whichever is less
  4. Rehab funds are placed in an escrow account and released as rehab is completed
  5. Lenders may charge additional fees, such as supplemental origination fee, fees to cover preparation of architectural documents and review of rehab plan, and a higher appraisal fee
  6. Homes demolished or razed may be eligible provided the existing foundation stays in place
  7. Can cover the costs of converting a property of an size to a one to four unit structure

If you are interested reach out to an approved FHA lender on HUD’s site here.

Hopefully this sheds some light on the “FHA 203k loans” that you may (or may not) have heard of and offers you buyers out there one more option to win the real estate game. Please let us know your thoughts and what questions that you may have that we did not answer.

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