Applying for any loan, including the 203K loan requires plenty of preparation and work to come up with the right documents for approval. Just like any other FHA loan, the 203K loan requires your standard documents with the exception of a few extra documents that are required in order to determine your eligibility for the loan.
Basic Income Documents
Income documents are required for every loan and the necessary documents are pretty standard across the board. Just like any other FHA loan would require, you must provide the following income documents for the FHA loan:
- Paystubs covering the last 2 pay periods
- The W-2s from the last 2 years
- Tax returns with all schedules if you work on commission or are self-employed
- A current Profit & Loss if you are self-employed
Your income documents must be consistent with what you state on your application and must be able to be verified by the lender.
Any lender you apply with for the 203K loan will need to pull a tri-merged credit report. This report will show the lender your outstanding debts as well as your spending/payment pattern. The lender will look at a variety of factors reported on your credit report including how often you made your payments on time, how much of your available credit you use up at one time, and how many open credit lines you have available. Your credit report is comprised of the payment history that the lender will go over with a fine-toothed comb as well as the score that each bureau comes up with. Most lenders will take the middle score of the three as your qualifying credit score.
Proof of Employment
Your lender will need to verify your employment even with the income documents you provide. The lender needs confirmation of the dates of employment you provided as well as the expected likelihood of your future employment with the same employer. You will need to provide contact information for your employer to your lender. If you are unable to provide contact information, your lender will perform a Verification of Employment which is a formal form that the lender completes to confirm your employment.
Proof of Housing History
If you have a housing history, whether mortgage or rent payments, you need to have proof of them for your lender. If you currently pay a mortgage, the payments will likely report on your credit report and you will not need to provide the lender with anything. If your mortgage does not report or you pay rent rather than a mortgage, you will need to provide canceled checks for the last 12 months to prove that you made regular payments on time to your landlord or mortgage company.
Proof of Assets
Typically, assets are not required for 203K loan approval, but if you need a compensating factor to make up for a higher than average debt ratio or a credit score that is on the lower side, assets can really help your situation. You can provide 12 months’ worth of your bank statements to show the lender that you have had the funds in your account for a long period of time and that they are not borrowed or placed into your account just to make you look better. The list of acceptable assets includes checking, savings, mutual funds, and stocks.
Bids from the contractors you plan to use are a unique component of the 203K loan. You cannot move forward with the projects you desire without approval by the lender. In order to obtain approval, you need to provide the lender with estimates from a few contractors along with the contractor’s qualifying information such as:
The lender will then, alongside the loan consultant, decide which contractor is the best suited for the job. The funds that the contractors get paid are held in escrow by the lender and not disbursed until everything is completed and approved, so the lender plays a large role in the 203K loan process.
In addition to the above documents, the lender will require that you get an appraisal completed. This appraisal is not strictly to determine the current value of the home, but also the future value after the work is completed. The appraisal cannot be completed until the lender approves a contractor and the work is written up and agreed upon.
It is fairly easy to apply for a 203K loan since the documents are fairly straightforward and easy to obtain. Any lender that offers this FHA program should be well versed in how it works and what to expect, so the process should go rather smoothly. There are some cases where lenders will require additional documents, but these cases are few and far between, making it easy to apply for this FHA backed loan.