You’re eager to take the plunge into homeownership, and you’ve found the property that you want to call home. Its location is ideal, and you can easily picture your family thriving there. There’s just one thing that keeps it from being perfect: the house. It needs work. Fortunately, the FHA home renovation loan offers a handy way to finance both the purchase of a fixer-upper and the renovations needed to transform it into a comfortable home.
The FHA Home Renovation Loan
What You Need to Know
FHA loans are not originated by the Federal Housing Administration (FHA). Instead, the organization sets guidelines and insures loans extended by private lenders that meet those guidelines. Designed to help people become homeowners, these loans offer borrowers with lower credit scores and credit histories with financial stumbles (like bankruptcies or foreclosure) a chance to secure a mortgage. However FHA loans aren’t just for first-time buyers seeking turn-key homes. In fact, if you’re intrigued by the notion of transforming an imperfect house into your dream home, the FHA home renovation loan, which is also known as the FHA 203K loan, is definitely an option worth exploring. Here’s what you need to know about this type of loan . . .
What does it take to secure an FHA 203K loan? Borrowers will need to meet the following qualifications to be eligible (source):
- Down Payment: Aspiring borrowers will need a down payment equal to or greater than 3.5 percent of the total of the property’s purchase price and its projected renovation costs. This down payment can be funded through savings or through a gift from a family member or a nonprofit organization.
- Credit Score: The FHA will accept FICO credit scores as low as 580. However, some lenders may require a higher score.
- Debt-to-Income Ratio: To win approval, the total of your monthly debts, including your new house payment, must generally be 43 percent or less of your monthly income.
- Citizenship: FHA loans are only available to U.S. citizens and lawful permanent residents.
- Occupancy: If you’re hoping to buy an investment property or vacation getaway, an FHA loan isn’t for you. These loans can only be used to fund the purchase of a primary residence.
- Loan Amount: With an FHA 203K loan, the amount you can borrow is not based on the home’s current value. Instead, it’s based on the property’s expected value once all the proposed improvements are completed. You can borrow up to 110 percent of the home’s future value.
What can you accomplish with an FHA 203K loan? In addition to securing the funds needed to purchase the home, you can also get monies for a wide array of renovations and repairs. The loan cannot be used to add luxury items like swimming pools, but that still leaves plenty of possibilities. As Zillow indicates, it can be used to complete projects like the following:
- Bathroom remodels
- Kitchen remodels
- Plumbing repairs and replacements
- Electrical work
- Heating and air conditioning systems
- Flooring repairs and replacements
- Deck and patio installations
- Siding and roofing repairs or installations
Although FHA 203K loans can be a fantastic way to secure the funds to both purchase and renovate a home, if you’re dreaming of fixing up your fixer-upper with your own hands, you might need to look elsewhere. As The Balance reports, you must use a licensed contractor for the work funded by an FHA 203K loan. In fact, it’s wise to select a contractor who has experience with this type of loan because there is a fair amount of paperwork to be completed and rules that need to be followed to make this form of financing work. While these loans do require some funds be set aside for additional expenses, accurate bidding is a necessity.
You might be surprised to learn that FHA 203K loans aren’t just for people buying a new home in need of work (source). If you already own a home that could benefit from some improvements, you may be able to use one of these loans to refinance your existing property and raise cash for the necessary renovations.
Investing in a fixer-upper can be a fantastic opportunity to secure the house that you want and tailor it to your preferences. It also allows you to build equity quickly as the improvements raise the property’s value. Could an FHA home renovation loan be a good fit for your plans? The expert team at PrimeLending of Kansas City would be delighted to help you explore the possibilities. Contact us today to learn more about our loan products and services, including our FHA and USDA loans.