A FHA 203k loan is a perfect financial vehicle for first-time home buyers with limited budgets, especially because the prospective buyer can select an affordably priced fixer-upper or as-is home, and, with one single mortgage, have the funds for both the repairs and the price of the home included at closing. But, before you dive in, it’s necessary to know the FHA 203k loan requirements.
It would be a mistake to believe you may not qualify for this government program because it is specifically designed to address traditional hindrances that keep a large portion of society from owning a home, such as:
First time home buyers are considered high risk for conventional home loans and face greater scrutiny in order to qualify. But since this is a government-insured loan, private lenders have less risk of loss if the homeowner defaults on the loan because the government backs the loan re-payment. This not only increases your chance of qualifying for the private lender, but these banks also attach more competitive interests rates because of the reduced risk.
A FICO credit score of 640 is the minimum score required to qualify for an FHA 203k loan. The FICO score is different from other credit bureaus, but it is calculated from your credit reports and is a reflection of your level of risk as a borrower. To receive a valid FICO Score, your credit report must have at least one account opened for six months or more, at least one account that has been reported to the credit bureau within the past six months, and no indication of a deceased person on the credit report.
A 3.5% minimum down payment for either the Standard or Streamlined FHA 203k includes not only the price of the home, but also the total costs of all repairs, all closing costs and fees associated with attaining the loan, and a 15% contingency for unanticipated costs. Compare this with the minimum of 5% down payment for conventional home loans and the prospective buyer is able to save thousands.
HUD property buyers can qualify for the FHA 203k loan requirements as these properties generally require repairs for housing code violations or property damage from former tenants — and often fall within marginalized areas that make it difficult to get conventional home loans. Keep in mind that the total appraised value of the property after all repairs and renovations must fall within the FHA mortgage limit for the area. Repairs must total at least $5,000 to qualify.
Multi-dwelling homes of up to four units will qualify if the purchaser designates one of the spaces as his or her permanent and sole residence. If commercial or retail space is attached, the loan can only be used to repair the living spaces. This presents a potential income generating option for those interested in using a home for living and also as a rental property. Loan limits differ by county and type of dwelling, so the maximum amount you can borrow will vary.
As with most government-run programs, proper paperwork, adherence to all requirements, and meeting all qualifications are essential. The following five tips will help in navigating the process and reduce prolonging the time before you can walk into your dream home:
Home ownership is a great experience and a fantastic investment for your future. Don’t get discouraged or think the process is difficult. When you choose the right team of real estate agents, appraiser, consultant, lender and contractors, attaining and rehabbing your new home will be a pleasurable experience.
The FHA 203k program offers many advantages and rewards, but like any loan program there are some confusing aspects involved with it, so don’t feel like you have to navigate the process alone. At Smartland, we are FHA 203k certified renovation contractors that specialize in working with you, banks, and lenders while you go through the FHA 203k program. For more information on our FHA 203k Renovation Services or to contact us to get started on the FHA 203k loan process, click the button below.