A 203K mortgage loan covers the cost of home repairs.
Although purchasing real estate to rehabilitate and sell is often a wise investment, buying a cheap home can come with drawbacks. In some cases, the property needs extensive repairs to be habitable. If an investor cannot afford to pay the costs of home rehabilitation out of pocket, an FHA 203K loan can make paying for repairs less stressful by rolling the cost of home repairs into the investor's mortgage loan.
Facts
To be eligible for financing with a 203K mortgage loan, a property must be a one- to four-family dwelling built a minimum of one year prior to the borrower's 203K loan application. The additional funds for rehabilitation must remain in an escrow account that the borrower can pull from to make repairs to the property. An investor cannot borrow more than 100 percent of the projected value of the home after repairs. Thus, if the investor purchases a home for $70,000 and intends to rehabilitate the home to increase its value to $100,000, he cannot borrow more than the $30,000 difference to pay for rehabilitation.
Function
The goal of the 203K mortgage loan program is to help rehabilitate homes in less than desirable districts. By allowing investors additional funds to repair these homes, the government hopes to attract stable buyers to previously objectionable areas. The more families that purchase homes in a given zone and properly care for those homes, the higher the property values of the surrounding houses climb. Thus, over time, 203K loans can transform an entire community, changing it from the "bad part of town" to a family-friendly neighborhood.
Benefits
Home loans under the 203K loan program are still FHA loans. An investor is entitled to all of the benefits of a standard FHA loan, such as a 3.5 percent down payment and lower credit requirements, in addition to a few additional perks. To obtain FHA financing, the property a borrower intends to purchase must undergo a strict evaluation to ensure that it meets safety and habitability requirements. This is a problem for borrowers who want to repair damaged homes and resell them for a profit. With the FHA 203K loan, however, safety and habitability issues won't prevent loan approval as long as the borrower prepares a repair proposal that includes budgeting for problem areas.
Considerations
A borrower cannot simply borrow an additional $30,000, claim to need it to repair her home and then spend it elsewhere. The U.S. Department of Housing and Urban Development requires borrowers to get a professional estimate of the cost of repairs and provide that estimate to the lender. The escrow account containing the additional money loaned through the 203K program is based on a contractor's assessment of the cost of rehabilitating the house.
Effects
The lender disperses the 203K loan in two payments. One payment arrives as soon as work begins and the final payment arrives after the repairs are complete. The repairs must be completed within six months of the date the borrower received the loan. If the borrower requested a 203K loan in excess of $15,000, the repairs and modifications must pass an inspection to ensure that the home is safe, habitable and meets all FHA standards. The U.S. Department of Housing and Urban Development and the lender holding the loan note can refuse to disperse the final 203K payment to the contractor until the work meets FHA quality standards.
Tags: 203K loan, mortgage loan, 203K mortgage, 203K mortgage loan, additional funds
