- May 18, 2018
- Posted by: Donna Vanderpoel
- Category: Connecticut, FHA 203k
Without specific updates and repairs, a home might not be suitable for living, and lenders might not be willing to fund loans on a property with problems. That is why FHA 203K Mortgage Loans are a great resource.
FHA 203k loans makes it possible for you to purchase and turn that property from a broken-down house, into your dream home using only one loan for both! 203K loans are guaranteed by FHA (Federal Housing Authority), which as a result makes it easier to get approved because lenders are taking less of a risk
Timing: Improvements must be completed within six months. Funds are placed in an escrow account and paid out to contractors as the work is completed
Eligibility: owner/occupants and nonprofit organizations can use FHA 203k, but not investors. The program is designed for one to four unit properties, but condo and townhome owners can use the program for interior projects.
You don’t need perfect credit, because the FHA protects lenders in case you default, it’s easier to qualify. You still need sufficient income to cover the payments. It’s best to have a debt to income ratio better than 31/43, but you might be able to go higher
Depending on the type of improvements you have planned, other types of loans might be a better fit. For environmentally sustainable projects (like upgrades to more energy-efficient heating and cooling systems) a Pace loan may be worth inquiring about. PACE is available for commercial properties as well
Loan Details: You must borrow at least $5,000 for the rehab component of your loan, and there are maximum loan limits set by the FHA that vary by location. You can borrow enough to finance 110% of the home’s projected value after improvement. Appraisers will review your plans and take the future value of your home into account. With FHA loans you will have loan limits to keep in mind for Connecticut.
Interest rate: the interest rate will vary, depending on the market in general and your credit.
Down payment: with the 203k loan, like other FHA loans, you can pay as little as 3.5% up front.
Contractors and DIY
203k loans give you the opportunity to make significant improvements to your home. You also get to do the things that matter most to you: if you want to use green or energy-efficient appliances and materials, you’re free to do so.
You can’t fund luxury items through 203k, but you can make dramatic improvements.
Unfortunately, you’re generally not allowed to do the work yourself. Even if you are a skilled, licensed contractor, don’t expect to handle all the work.
You must use licensed contractors for all work, and it’s important that they know you’re using 203k. This might rule out certain handymen you’ve used in the past and have developed a relationship with. If you’re an investor hoping to flip houses, there are better options, including money from private lenders.
- Paperwork: These loans are notorious for the paperwork. You’ll fill out numerous forms, and your contractors are also subject to some of this pain. If you don’t have the patience to follow through on everything, consider other options.
- Time: in addition to the time it takes to deal with paperwork, you’ll have to wait on answers from the FHA and your lender. They’ve got just as much (or more) paperwork to do on their end. Especially if you’re trying to buy a property in a competitive market, this can be a deal breaker.
- Required standards: You might have specific improvements in mind, but the FHA also requires that you deal with health and safety issues and meet all building codes. Lead paint, electrical problems, and other items may be added to your project list unexpectedly. Dealing with those issues is probably a good idea anyway, but you have less choice on when and how to fix those problems.
When considering an FHA 203K loan, ask your mortgage professional if it is the right fit for you and your needs. There are many mortgage products out there, educate yourself and you too can live happily ever after.
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