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Mortgaging a Fixer-Upper: How to Get the Right Financing

FHA 203k financingFHA 203k financing — The dream of home ownership with a superior loan structure.

No matter how you get to it, home ownership is a good thing. It means you have stepped outside of the realm of renting and are moving toward financial stability. A less expensive route for homeowners is to purchase an older property in need of rehabilitation work to save money on the asking price by performing the repairs on their own. FHA 203k financing is geared specifically to individuals looking to buy a fixer-upper.

Mortgages, just like homes, come in all shapes, sizes, and colors. When purchasing a rehab property, know that banks often refuse to loan on fixer-uppers due to the nature or aspect of the repairs needed to bring the house to code. This is the precise situation FHA 203k financing was created for.

What is FHA 203k Financing?

The FHA 203k loan was created for people who want to buy an older home or property in need of repairs. Backed by the federal government, FHA 203k financing gives you the money to purchase the house and the additional cash to conduct all of the repairs. FHA 203k financing will also allow for a 20% contingency reserve, safeguarding against the possibility that the repairs will cost more than expected or bid.   A few words of caution, however — know what you are getting into. Have a thorough inspection performed on the fixer-upper prior to committing to purchase. Do not rely on what the realtor tells you, they rarely have all the information pertaining to the true condition of the house. That could spell disaster for you in the long run. Remember that a realtor is limited by the information the seller has given them. Be proactive and have the home inspected. This is money well spent.

What FHA 203k Financing Covers

First, do not be tempted by the first contractor to give you a bid on the repairs needed. Get several bids from reputable local contractors. Make sure that everyone involved is completely aware of what needs to be done. Your inspection report will aid in this process by spelling out specifically what has to be fixed, and what doesn’t.   Basically, FHA 203k financing covers everything except fluff or vanity. Things covered include:

  • Flooring, siding, decks and patios.
  • Plumbing, heating, and HVAC systems in need of repair or extension.
  • Bathroom/kitchen remodels, additions, and extensions of existing floor plans. Up to and including a second story or a new wing.
  • Mold remediation, sheet-rock replacement, and extensive clean-up due to age or natural events (flood, fire, etc.).
  • Sub-systems such as floor joisting, roof rafters, and joists.

Items not covered by FHA 203k financing:

  • Installing a pool or a tennis court.
  • Building a six-car garage.
  • Extensive landscaping that has no impact on the livability of the home.

The more you know, the better your chances of getting FHA 203k financing. Your contractor will be a silent partner in acquiring this loan, thus the need to have a thorough home inspection performed before you apply for FHA 203k financing. Because these are federally backed loans, much paperwork is involved, and for good reason. The feds want to make sure they are getting the most reliable and consistent bids before they loan money on them. Often FHA 203k financing will request multiple bids on a project so that they can compare and contrast. Be prepared to get different bids from different contractors, the loan is worth it.

Take Your Time

Different mortgage providers will establish different rates and strictures for FHA 203k financing. They are bound to federal guidelines, but can alter loan structures slightly. Shop your 203k loan just like you shopped for your home — carefully and with attention to detail. Know your credit rating and how it will affect your loan rates. Find out who is offering the lowest rates for your area and your region. Home ownership is a huge expense; you need to get the best deal for yourself.

Home ownership is a process, so be prepared to treat it as such. Take the time to get your credit, your contractors, and your loans in line before taking that step. Do not be rushed, this will probably be the biggest expense you incur in your lifetime. Purchasing a fixer-upper is an excellent strategy, as long as you can obtain FHA 203k financing. Don’t take the financial risk of purchasing a fixer-upper without FHA 203k financing. 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.

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