What Is an FHA 203K Loan?
An FHA 203K Loan is a loan that is insured by the federal government but issued by a traditional lender. The loans offer between $5,000 and $35,000 to homebuyers or homeowners who wish to rehabilitate residential properties. They can be used for one to four-family dwellings, provided the owner lives in a portion of he property. The homes that qualify for this loan must be at least one year old. The loan program allows the homeowner to roll the purchase of the property and the cost of the repairs, up to $35,000, into one loan, rather than purchasing the home and funding the repairs separately.
Getting a FHA 203K Loan
If you are interested in using an FHA 203K loan to help you fix up a rundown property, you will first need to find an FHA approved lender. The Housing and Urban Development website will help you find one in your area. Then, seek pre-approval for the 203K loan.
Once you have pre-approval, you will need to get an FHA consultant and start shopping. If you find a good property, submit a bid. Then, alert your lender of the price you have bid for the property. You will then need to create a work write up. This document shows the repairs you wish to do and the estimated cost for those repairs. Before creating the work write up, you will want to work with the FHA consultant to create a feasibility study. This study shows whether or not the proposed repairs will bring enough of an increase in the value of the property. If you put $10,000 worth of repairs into the house, you want the value of the home to increase at least $10,000.
One your lender receives the work write up, an appraisal will be ordered to determine the value of the home after repairs. While you are waiting on the appraisal, you will get actual bids from contractors for the work. You will then submit a final quote to the lender showing how much you need including both the purchase price and the cost of repairs. Your FHA consultant will help oversee this entire process, providing you with help when needed.
If your loan is approved, you will close on the loan. The money for your repairs is then placed in escrow. Half of it will be released for you to pay your contractors before they begin working. The contractors will do the work, and the rest of the money will be released so you can pay them after a final inspection. If there is any money left over, it will be placed on the principal balance of the loan. You will be given six months to do the repairs, but extensions are available if absolutely needed.
Seb Frey is a Capitola, California Real Estate Broker specializing in Santa Cruz Real Estate. He is fluent in Spanish and enjoys helping people find their piece of the American Dream in Santa Cruz. You can find Seb's blog at SantaCruzHomeBroker.com/blog.View all articles by Seb Frey
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