Perhaps you have heard of an FHA loan, which is a common tool used by first-time homebuyers seeking to buy a home with a low down payment. However, what is an FHA 203K loan & what do the extra numbers and letters mean? The FHA 203K is another loan type available from the Federal Housing Administration (FHA). In a nutshell, when you are considering buying a home that requires some work, an FHA 203K may be a great option. Given the persistent tight inventory of homes for sale, it has become quite challenging for homebuyers to find a suitable home for their needs. As a result, many of the homes available on the market are in such poor condition that oftentimes they present challenges for obtaining a conventional mortgage. This is where an FHA 203K renovation loan comes in real handy.
The FHA 203K loan is great for small to medium-sized renovations, and can be a great way to get started on your home improvement project. With this said, the FHA does require that you have a good credit history and meet certain income requirements. As an added bonus, the interest rate on a FHA 203K loan is typically lower than the interest rate on a conventional loan.
Pros of an FHA 203K loan
- Allows buyers to get additional money to fix up the house on all one mortgage (no need for additional money from savings or through credit cards required)
- An FHA 203K loan can allow for a low down payment requirement of only 3.5%
- Various options for both fixed and variable rate loans
- Seller contributions of up to 6% of the home’s purchase price are allowed
- Typically lower closing costs vs other loans
- A larger tax deduction is available due to interest from the home purchase and renovation combined
Cons of an FHA 203K loan
- FHA 203K loans may only be used for your primary residence. Therefore, an investment property does not qualify.
- More rigorous paperwork is required from lenders when obtaining a FHA 203K loan.
- Typically, renovations must be completed by a licensed and approved contractor.
- Property mortgage insurance (PMI) will be required as part of the loan. (This is similar to a regular FHA loan.)
Given the low inventory of homes for sale in the current housing market, it is quite likely that many of the homes available to purchase may require some renovations. With this said, the FHA 203K loan offers a great solution for these scenarios. Although the idea of taking on a renovation project upon purchasing a home may be intimidating for many buyers, it is important to remember that the market for these distressed homes can be significantly less competitive. Therefore, buyers may find tremendous value with this approach.
Are you looking to buy a home in the South Florida area? Contact Natasha at Live South Florida Realty, Inc. today! In addition, be sure to download the free Florida Home Search app for your mobile device.