FHA 203K Loan Guide
Loan Type: FHA 203K Home Loan
Specific Uses: First Time Home Buyers, Refinance, Small down payment, Home Construction, New Build, Home Renovations & Repairs.
What is an FHA 203K Mortgage?
An FHA 203K Mortgage is a Federal Housing Authority mortgage home loan. It is a loan that is insured by the government to the bank or lender in case of a default by the Homeowner(s). This is a great loan option for first time home buyers, refinancing, cash out refinances, minimum down payment ability, blemished credit scores, debt consolidation and lower income households. The FHA 203K Home Loan is designed for Home Renovations and repairs. This is a program that allows you to buy the house and roll in the costs of repairing the home, simultaneously.
FHA Home Loan Summary:
This loan program allows the Homeowner to finance in the costs of the home renovations and repairs into the financing. Be sure to know the exact work that you want to have completed so you can estimate the costs for the financing.
Beware that on an FHA Home Loan, the interest rate might be lower but there is Private Mortgage Insurance added into the monthly mortgage payment.
An FHA Home Loan also will charge Upfront Mortgage Insurance of a rate of 1.75% and .85% annually.
- The first step is to find a property that requires repairs before you can live in it. Submit an offer to purchase this house. Your purchase and sale contract must specify that you will be using an FHA 203(k). Your offer should be contingent on your getting approved for this loan.
- The FHA 203(K) loan is insured by HUD and only qualified lenders are approved to offer this loan. HUD can provide you a list of qualified lenders. You will need to submit your loanapplication to one of them. Since the loan includes rehab costs, you must include a detailed list of repairs that will need to be made and the cost for each repair.
- The lender you have chosen will have requirements that you must meet in order to qualify for the loan. These will usually include minimum credit scores, debt-to-income ratios and proof of income. You will need to meet all of the lender’s requirements in order to be approved for the loan.
- Once your loan is approved, a date will be set for closing. At closing, the seller will be paid. The money for rehab costs will be placed into an escrow account that is controlled by the lender.
- After closing, your contractor will begin the rehab work. At certain milestones, the contractor will list work that has been completed. The lender will order an inspection to verify the work has been completed satisfactorily. If the work passes inspection, the lender will be paid from monies in the escrow account.
Here are the types of improvements that may be completed using the Section 203 (k) financing:
- structural alterations and reconstruction
- modernization and improvements to the home’s function
- elimination of health and safety hazards
- changes that improve appearance and eliminate obsolescence
- reconditioning or replacing plumbing; installing a well and/or septic system
- adding or replacing roofing, gutters, and downspouts
- adding or replacing floors and/or floor treatments
- major landscape work and site improvements
- enhancing accessibility for a disabled person
- making energy conservation improvement
HUD (U.S. Department of Housing and Urban Development) requires that properties financed under this program meet certain basic energy efficiency and structural standards.
More information on this can be found here:
FHA Home Loan Guidelines:
- DTI: (Debt-to-Income) Ratio cannot exceed 45%
- Max Loan Amount: This depends on the county and its Loan Limits
- Income: 2 Years full tax returns required
- Min Credit Score: 620 (depending on Lender)
- Max CLTV: (Combined Loan-to-Value) on an FHA Home Loan is 110%
- Max LTV: on a Cash Out Refinance is 85%
- Collections: Any Collection balances over $2,000 must be collected or have made payment arrangements prior to closing.
- Cash Out Max: The maximum amount of money back for a cash out refinance with FHA is $200,000.00
- Down Payment: 3% Down Payment required on FHA Home Purchase loans
- Missed a Payment? Only two 30 Day Mortgage Late Payments allowed in the last 12 months.
FHA Home Loan Facts:
- If you are located in a Community Property State, the lender is required to pull credit on a spouse that is not on the mortgage.
- When the Lender is verifying Assets, they will need to document source of funds of large deposits over 1% of the Loan amount.
- Debt-to-Income Ratio’s on an FHA mortgage are usually higher (better) for borrowers with income qualifying issues.
- Minimum FICO (Credit Score) Required = 620. Sometimes lower depending on the Lender.
There is still much more information about FHA 203K Home loans provided by the Federal Housing Authority. Reach out to your bank or lender for more specifics on what you can qualify for.
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