Sometimes buying the perfect home means buying a home that needs some fixing. The problem that many people fall into is that they cannot afford to pay for the updates or repairs that the home needs after paying the costs to obtain a mortgage. The solution that solves both problems is to get the 203K loan. This loan provides the funding not only to purchase the home but to do most of the repairs as well. This loan, which is backed by the FHA, has rules and regulations regarding what can be included in the repairs that are covered, but it is a great loan to get the job done.
Two Types of 203K Loans
There are two different loans you can get when you are trying to purchase and fix up a home. The first is the 203K streamline loan. This loan, as the name suggests, requires less work to obtain, but you are also limited with the number of repairs you can have done. There are not any structural changes allowed and the total amount of repairs cannot exceed $35,000. With a full 203K, you can have structural changes made to the house and you are not maximized with a certain amount of repairs as long as you remain within the loan limits for the area the home resides.
How the 203K Works
The 203K loan is a purchase and rehab loan in one. The key factor in the process, however, is that the loan closes before you begin work on the home. This is the only way that it is possible to start rehabbing the home. If you are not the owner, you cannot rehab it. The money that is included in the loan to rehab the home is placed in an escrow account and distributed as necessary. Typically, funds are provided to the contractors in two installments – half is paid up front and the other half upon completion of the project.
The bids that each contractor provides are approved and made permanent prior to the loan closing. Every bid goes through the lender that you are using and must be approved. Every loan will have a 203K inspector that ensures that the work being done is within the standards and that the cost is appropriate for the repair. The only exception to this rule is repairs that are less than $15,000. Once the inspector ensures that the work is complete, the remainder of the funds can be distributed.
Is the 203K Loan Worth It?
Many people wonder if the hassle of hiring contractors, dealing with inspectors, and handling a loan with a different aspect is worth it. The answer relies on you, but generally, you will have the upper hand because you will gain a quick amount of equity in the home you purchase once the repairs are complete. Most sellers decrease the selling price of homes that need extensive repairs because they know that the market is not on their side when it comes to potential homebuyers wanting the home. Because of this, the price is set lower, which means once the home is in good condition and the value appreciates, you as the new owner will gain immediate equity.
The 203K loan can be a great choice for you whether you need to make minor repairs or do a complete structural change. The process is fairly straightforward and while it may take quite a bit of time to get through, it is worth it in the end. Remember that any repairs being done need to be completed in 6 months in order to get proper payment. Use the services that are provided to you and listen to the advice given by the FHA inspector assigned to your case to ensure a successful outcome.