How The 203k Loan Helps You Finance Your Home Repairs In New York
There’s a certain charm to fixer-uppers. For those of us that love a good project, purchasing a fixer-upper home is the best way to put a personal touch on the house that we will come to call a home in the near future.
Or, if you’ve had your home for a while, who better to repair and renovate if not the person who has lived in it and knows its ins and outs.
But repair and renovation costs money. Even if you’ve been hoping for a project, or if you just want to get something in working order again, any kind of repair requires you to spend for it.
But don’t let this dissuade you from your fixer-upper. Don’t let it stop you from getting your home back into tip-top shape. There are options for homeowners with a project on their hands.
In this article, we will be addressing one such option: the 203K loan.
What Is The 203K Loan?
The FHA 203K rehab loan, more well-known as the 203K loan, is a loan from the Federal Housing Administration that allows homeowners to finance the purchase of a home and its repair costs into a single loan.
The 203K loan is popular for home improvements and repairs, particularly with home buyers who have fallen in love with a fixer-upper and wish to purchase the property. It allows home buyers interested in these properties to consolidate the costs of purchase and repair into one loan.
The 203K loan is a mortgage backed by the government through the Federal Housing Administration. It was created to support the renovation of older properties and fixer-uppers for those hoping to purchase or reside in these properties.
It is essentially a construction loan created to support home buyers with lower incomes or lower credit scores, to encourage them into home ownership. Fixer-uppers and properties that require renovation and repair are popular among lower income home buyers for their affordability, but often times the cost of repair can dissuade them. The 203K loan was created to purchase and repair the home in a single loan.
The 203K loan can also be used to finance remodelling for an existing property, so they are available to homeowners who already own their fixer-uppers.
The 203K loan offers a lot of flexibility when it comes to credit qualifications for approval. This is what makes it so popular for home buyers with lower credit scores. The 203K loan offers either 15 or 30-year fixed-rate mortgages or adjustable-rate mortgages. To qualify, a borrower must make a minimum down payment of 3.5% of the combined cost of the property plus repairs.
How Does The 203K Loan Work?
The 203K loan has a minimum loan amount set at $5,000. As the borrower, you may loan up to the value of the property plus the repair costs, or up to 110% of the estimated property value after completed repairs.
Here’s How It Goes:
1. First, You Purchase A Fixer-Upper Or Refinance Your Existing Properties.
You want to make repairs on your home and wish to borrow an amount based on the estimated value of your home after renovation. This is what the 203K loan is for.
2. Next, You Find An FHA 203K Lender.
Once you’ve decided to remodel or repair the property, you can work with an FHA-approved lender to apply for the 203k loan. You will need to submit the cost for renovation, the price to purchase or refinance the property, as well as the renovation fees. You will also need to submit contingency reserves of up to 10% to 20% of the renovation bid price, in case the cost goes over budget.
3. Work With A Contractor.
A general contractor must be able to provide a detailed bid for your renovation and repair costs. This will be submitted to the lender as part of your application.
4. Acquire An As-Completed Appraisal.
You will need to have the property appraised in order to confirm your home’s value before and after the renovation.
5. The Lender Forwards Your Documents To A Loan Underwriter.
Once you have completed your application, including the bid, appraisal, and other necessary information, the approved lender will forward your documents to a loan underwriter. You will then wait for approval regarding your loan.
6. Finally, You Close On Your FHA 203k Rehab Loan, Purchase Or Refinance, And Renovate Your Property.
Once your loan is approved, all you need to do is sign the closing documents. Upon closing, you may now use your loan to either purchase or refinance your home. The funds from the loan go to either the seller of the property you are purchasing from, or from your previous mortgage lender if you are refinancing.
Funds for renovation and repair go to an escrow account, from which the lender will pay the contractor depending on an agreed-upon schedule. Renovation work must begin within 30 days of the loan’s approval, and must be completed within six months.
Need More Info?
The 203K loan is one among many options homeowners hoping to purchase or refinance their fixer-upper can take. If you are interested and would like to know more about the process and other options, Procopio Team at Hunt Real Estate is here to assist you. If you are residing in New York state and would like to work with us, get in touch with us at 315-350-0571 to get started.