203K Loans: How They Help Homebuyers, Especially with REO Homes
Have you been passing up on homes that require costly renovations but otherwise would have been a great buy? If you are running short of cash, then you might want to consider taking the Federal Housing Administration’s (FHA) 203K mortgage insurance program.
So, what is 203K mortgage insurance program?
The 203K Loan program is primarily a home improvement loan program which aims to create better homeownership opportunities for the first-time home buyers as well as for homeowners who wish to rehabilitate their properties.
The FHA 203K loans are insured by the Federal Housing Association against default and foreclosure. This means that the FHA-approved lenders run a lower risk of loosing their money and can offer loans at lower interest rates. It allows you to buy a home with a down payment for as low as 3.5% with maximum mortgage amount of up to 110% of the expected value of the property after rehab.
How the 203K Loan Program Can Be Used
This program can be used for the improvement of existing one-to-four unit dwellings in one of the following situations.
- Purchasing, modifying, and rehabilitating an existing property (home and attached land).
- Paying off an existing debt on a current dwelling and rehabilitating it.
- Purchasing an existing home with the intent to move it to a new foundation.
Eligibility for 203K Loans
To be eligible for the FHA 203K mortgage loan, the construction of the property must have been completed for at least one year, and the number of units on the site must fulfill local zoning requirements. Cooperative units are not eligible, and all newly constructed units must be attached to the existing dwelling.
You can also use a 203K mortgage loan on a ‘mixed use’ residential property, provided that the floor area for commercial purpose is less than 25 percent for a one story building, 49 percent for a two story building, and 33 percent for a three story building.
Commercial use should not affect the health and safety of its occupants. The rehabilitation funds can only be used for residential functions of the dwelling and areas used to access the residential part of the property.
203K Loan: Streamlined Version
The streamlined version of the 203K loan program further simplifies requirements by eliminating certain extra costs and conditions associated with the regular 203K loans. Here, a single loan is used to refinance the cost of renovation. This means that you don’t have to go through multiple requirements or complex procedures. Streamlined 203K loans are meant for repairs under $35,000 that do not involve any kind of structural renovations. So, there is no involvement of HUD, 203K consultants, or architects.
How 203K Loans Help REO Home buyers
The 203K loan is especially helpful if you are looking for bank owned houses, otherwise known as REO properties. These properties come up for sale in ‘as-is’ condition and in most cases, repairs and renovations are left to the buyers.
Obtaining loans for repairs and renovation is typically a complicated procedure and subject to a number of restrictions. FHA’s 203K loans overcome these limitations and present an opportunity for buyers looking for a fixer-upper. With the FHA’s 203K loan program and its streamlined version, you no longer have to hesitate to invest in REO properties.
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