You have found the perfect house. Well, in reality, it needs quite a bit of work. The kitchen, for example, is stuck in 1986. But in your mind, it is perfect. The neighborhood is quiet and there are good schools nearby. Also, the commute to work won’t take forever, which is a big plus. How can you find the money to make your home perfect? What about a 203(k) Rehab Loan from the Federal Housing Administration (FHA).
About the FHA 203(k)
The FHA is an agency of the Department of Housing and Urban Development (HUD). The 203(k) loan program helps homeowners pay for the purchase, refinance, and rehabilitation of single- and multi-family homes across the country. This loan is not for investment properties or second homes, but if you found the house you want to live in and need a little bit extra to make it perfect then this is the way to go.
Some of the advantages of 203(k) home improvement loans include savings, lower interest rates, and low down payments. Why savings? Most traditional home loans require that buyers provide the capital for the improvement of ‘need of work homes’. However, the 203(k) program is different. It understands that most home buyers, especially first-time home buyers, probably don’t have the available cash to pay for upgrades before buying a home.
The 203(k) program allows the home buyer to include the cost of improvements in mortgage. As such, one can get the funds they need to make their home perfect. The best way to look at the 203(k) is home repair and home mortgage rolled into one.
Another advantage of a 203(k) are the interest rates. As these loans are guaranteed by the Federal Government, they usually have much lower interest rates than standard bank home improvement loans. In addition, these loans are also longer in term than most other home improvement loans. This is because the funds for making your home perfect are rolled into the mortgage itself. In fact, rates are currently near historic lows, which is a big plus for home buyers.
Low down payments are a hallmark of FHA loans and the 203(k) is no different. All you need for the down payment is between 3.5% to 5% of the of the home’s value, depending on your area. But you can borrow up to 110% of the expected value of your home once it has been made perfect. Very few loan programs combine such low-interest rates with low down payments.
To Qualify, The Property Must be Eligible
As you can see the 203(k) loan program has a number of advantages over other home improvement loan programs. No wonder it is so popular. One of the tricks when applying for a 203(k) is to make sure your dream home is among the eligible property types.
First of all, these loans are not for newly constructed homes. The property should be at least one-year-old. As mentioned, this loan is not for second homes or investment properties, but you can use it for multi-family homes if you plan on making one of the units your primary residence. You can also use this loan to purchase and fix up townhouses and condos. This is really useful for home buyers in big cities where detached homes are less common.
Two Types of 203(k) Loan Programs
There are two types of 203(k) loan programs you can choose from. The first is the standard ‘K’. This program allows the home buyer to make ‘substantial’ repairs. This may even include tearing down an existing house and building a new one. While the streamlined ‘K’ is ideal for cosmetic repairs or improvements. This would include adding items like gutters, new windows, or a new roof.
If you are looking to add your dream master suite to the house, then you will need to apply for the standard ‘K’. This program allows for structural changes which includes kitchen and bathroom upgrades, as well as adding luxury items such as a Jacuzzi.
No matter which 203(k) home improvement loan program you choose, these federally-guaranteed loans are a great way to turn the right property into you dream home. The appeal is that you don’t need to pay for the improvements before you buy the home and the rates are much lower than many other mortgages on the market today. So if you are looking to make your home perfect, then a 203(k) might be the right loan for you.
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