Who qualifies for a 203k loan? Generally, most applicants wh..

Who qualifies for a 203k loan?
Generally, most applicants who would qualify for an FHA loan will be approved for a 203k loan, too.

You must have at least a 580 credit score (though some lenders require 620-640); at least a 3.5% down payment based on purchase price plus repair costs; adequate income to repay the loan; not too much existing debt; and U.S. citizenship or lawful permanent residency. In addition, you must be purchasing a home you plan to live in.

How does a 203k loan work?
The 203k process includes a few extra steps compared to a standard FHA loan.

First you will apply and get approved. Then you find a contractor, get repair bids, and determine your final loan amount including construction costs.

Next, the mortgage company has to underwrite and approve your loan. After that the loan can close, the contractor can start renovations, and the mortgage company will pay them as construction is completed.

After a final inspection, you’re free to move into your new home.

What does a 203k loan cover?
The 203k loan covers the full purchase price of the home plus any eligible repairs (non-structural repairs for the “Limited 203k” program). For example, if the home price is $250,000 and $20,000 in repairs are needed, the new loan will be $270,000 plus a required contingency or “buffer” percentage.

What is the maximum 203k loan amount?
You can borrow up to 110 percent of the property’s proposed future value, or the home price plus repair costs, whichever is less. But note that your total purchase price plus repair costs must still fall within FHA loan limits for the area. Look up your local limit here.

Is a 203k loan worth it?
A 203k loan can be well worth the extra effort, especially if you can buy a home at a discount. For instance, a buyer pays $200,000 for a run-down home, but does $20,000 in repairs. Because the home is now in “turn-key” condition, it would be worth $240,000 on the open market. The buyer gains $20,000 in equity immediately. This scenario is not uncommon in today’s market.

Can I use a 203k loan to flip a house?
No. These loans are only available to buyers who plan to live in the home for the foreseeable future. Yes, you are able to sell the home someday, but you can’t enter into the transaction knowing you will sell the house as soon as it’s fixed up.

Can you buy furniture with a 203k loan?
No. Only permanent, attached upgrades are allowed to be financed. Appliances are okay, but not furniture which does not add value to the home and can be removed.

How much do you have to put down on a 203k loan?
Like all FHA loans, the 203k has a low down payment requirement. The loan requires you to put down 3.5% of the total purchase price plus repair costs and required contingency (“buffer”) costs.

For instance, a $200,000 home with $30,000 in repair and contingency costs would require a down payment of $8,050 (3.5% of $230,000).

Keep in mind that closing costs apply and are in addition to the down payment. Closing costs for a 203k loan are typically between 3% to 6% of the purchase price.

How long do you have to live in a house with a 203k loan?
You must live in the home as your primary residence for 12 months before renting it out or selling.

How long does it take for a 203k loan to close?
It will likely take 60 days or more to close a 203k loan, whereas a typical FHA loan might take 30-45 days. There is more paperwork involved with a 203k, plus a lot of back and forth with your contractor to get the final bids. Don’t expect to close a 203k loan in 30 days or less.

Can I do the repairs myself with a 203k loan?
Usually, no. You must choose licensed contractors for all work. The only exception is if you are licensed and a full-time contractor by trade. In these cases, some lenders may approve DIY work.

Can a 203k home improvement loan have an adjustable rate?
Yes. You can choose a 203k loan with an adjustable-rate (ARM) or a fixed rate (30- or 15 yyear term). An adjustable-rate could save you money, especially when rates are high, if you plan to sell the home soon after the first year you own it.

Do 203k loans require higher loan origination fees?
Yes. Along with the usual closing costs, expect an extra supplemental origination fee of about 1.5% of the loan amount. And, you’ll be charged a HUD consultant fee depending on the size of your project. This fee typically ranges from $400 to $1,000.

Is a 203k loan a good idea?
An FHA 203k loan can help you gain immediate equity in your home by financing home improvements that add value right away. However, the application process takes more time and more attention to detail when compared to a standard FHA or conventional loan.

Can I refinance into a 203k loan?

Most people use the FHA 203k loan to buy a home, but it can be used for refinancing, too.

As long as you have at least $5,000 in improvements, you can use this refi option.

The lender will order an appraisal that shows two values: the “as-is” or current property value, and the “improved value” after renovations.

Your maximum refinance loan amount (subject to FHA loan limits) is the lowest of these three calculations:

The existing debt before rehab, plus the estimated cost of improvements and allowable closing costs
The as-is value plus rehab costs
110 percent of the after-improved value x 97.75%
If you have owned the property for less than one year, the lender must use acquisition cost, plus the documented rehabilitation costs, for your maximum loan amount.

You do not need to have an existing FHA loan to use an FHA 203k loan for refinancing.

How do I apply?

It’s always wise to shop around and find the best lender. But with a 203k loan you may not always want the lender with the lowest interest rate.

It’s often better to accept a higher interest rate if it’s coming from a lender with lots more 203k loan experience than the lender who’s offering a lower rate.

This is a rare exception in mortgage shopping in which the lowest rate may not be in your best interest.

In the world of 203k loans, contractors and lender experience is typically more of a consideration than cost.

Complete a short form at this link, and check your eligibility for a 203k loan from a lender in our network.

You’ll receive a rate quote, eligibility check, and further advice on whether the loan is right for you.