The 203K loan enables you to purchase a home that needs renovations. What types of homes are allowed and what restrictions exist on these homes, though? Luckily, there are not a lot of restrictions and the types of property that are eligible include 1 to 4 unit properties. The key factor is that it is a residential dwelling, meaning that you live in the property or at least in one unit if it is a multi-unit property. The other restrictions are as follows:
- The home must have been in existence for at least one full year
- There may not be more than 4 units on the property
- The home must meet the local zoning requirements for residential living
- No units can be detached from the property
- Condo improvements can only be on the interior of the unit
- Only the residential part of a mixed-use property can be renovated with the 203K loan
Additional Commercial Zoning Requirements
If you purchase or refinance a commercially zoned property, there are certain additional requirements you must abide by in order to qualify for the 203K loan. These include:
- If it is a one-story property, only 25 percent of the home can be zoned for commercial use. If it is a three-story unit, 33 percent can be zoned commercial and if it is a 4-story unit, 49 percent of the property can be zoned for commercial use. Any commercial zoning beyond these percentages is not allowed.
- The business conducted in the commercial portions of the building cannot put the health and wellness of the residents at risk.
- Any money obtained from the 203K loan can only be used to improve the residential portion of the property.
Downsizing Larger Properties
If you have a larger than 4-unit property, the only way you can use the 203K loan on it is to downsize it to a 4-unit or less property. The key factors to getting approved are that the property is owner-occupied, meaning that you do or will live in one of the units and that you are converting to no more than a 4-unit property. Many borrowers have used this loan type to downsize apartment buildings or even to convert a multiple unit property into a single family residence. As long as the zoning for the area that the home exists allows for the changes, the 203K financing option will exist.
The Appraisal Difference
The appraisal is often the thing that holds up many different types of loans. If the appraisal comes back too low, many borrowers are left without adequate financing or they are forced to come up with the difference between the sales price and the appraised value, which is not always an option for everyone. The 203K appraisal, however, does not rely on the original appraised value as that is the “as is” value, which more often than not is lower than the future value. It is the future value that the lenders base your financing on, enabling you to take out up to 110% of that future value in order to make the necessary renovations or desired changes.
Purchasing a Foreclosure
One of the best uses of the 203K loan is to purchase a foreclosure because these homes are typically not in the best shape and would not pass the code requirements put in place by the city, county, and the FHA. With 203K financing, the original appraisal does not need to pass any type of code – it is the final renovations that must pass. If the repairs and renovations being done on the home are going to bring the home up to code and the lender and loan consultant approve the work, the foreclosure can be purchased with the 203K loan, which means bringing a much lower amount of cash to the closing than you would have to bring if you were to fund the changes yourself.
The good news is that the 203K loan does not have a lot of requirements when it comes to a qualifying property. You can purchase a home that is run down and even unlivable and still be able to close on your financing. The key factors for this type of financing, however, are that you get the work that is to be done approved by the lender and in writing. The lender and loan consultant assigned to your case will help you determine the work that must be done in order to close on the loan. There is a specific timeline you must follow in order to obtain 203K financing, however. Generally, the work must start within 30 days of the closing and be completed within 6 months of the closing date. If the home is unlivable, you can live elsewhere, but as soon as the home is livable, you must become a resident of the home in order to qualify under the 203K guidelines.
If you are interested in purchasing a home that needs extensive work, consider the 203K loan; it offers many benefits and enables you to make a home look exactly how you desire it to look. If you fall in love with a home and its layout, but do not like the décor or even if you do not like the home’s layout and want to change its entire structure, you can do so with the 203K program, as long as it meets the above requirements. The largest requirement is owner occupancy, since the FHA program was started to help people own their own home, not to help investors deepen their pockets with their profits from renters. Not every FHA lender offers the 203K program, so make sure to shop around to find a lender that is willing to work with your situation and your property to help you purchase the home you desire and get the work done that you need without breaking your bank account.