An FHA 203k Loan Can Help You Buy An Affordable Home
Millennials are having a tougher time in the home mortgage market than the generation that preceded them. Average home prices in more desirable areas are often out of reach of the average millennial salary, and whatever may be available needs a lot of “love and attention” before it becomes “move-in ready” space.
72% of millennial renters who plan to purchase a home cite affordability as a reason that they are delaying homeownership, with 62% pinpointing a lack of down payment savings specifically. 48% of millennial renters have zero down payment savings, while just 11% have saved $10,000 or more.
The solution for some in this situation may be a 203k FHA conforming loan, if one is patient and willing to do a bit more than the typical mortgage-only homebuyer. These FHA (Federal Housing Administration), or government backed loans, allow borrowers to combine the renovation costs of a property with the total mortgage amount. The buyer’s down payment is based on the full loan amount and the payments will be higher than just paying the mortgage alone, since the estimated renovation costs are wrapped up into the total loan amount.
How to Qualify for an FHA 203k Loan
In order to qualify for an FHA 203k Home Improvement loan, you will need a credit score (FICO) of 620 or higher and a maximum debt-to-income (DTI) ratio of 50%. Some lenders may be more flexible with both FICO scores and DTI, depending on the borrower’s history, current situation, and future outlook. The full amount of the loan cannot exceed the maximum limit of the conforming FHA loan amount, which is currently at $486,100 or $726,500 for high balance loans.
Summary of FHA 203K Loan Qualifications and Loan Limits:
- FICO Score: 620 or Higher
- Maximum Debt-to-Income Ratio: 50%
- Maximum Loan Amount: $486,100
- Maximum Loan Amount (High Balance): $726,500
The process is similar to applying for a regular FHA loan, meaning that you will be required to complete documentation and provide verification of your income and assets. Where the process differs from the mortgage-only loan, is that you will also need to submit a detailed cost estimate for the renovation of the home, before your loan is approved. An appraiser must then determine the value of the home in its “as is” condition and then estimate the future value of the home based on the repair costs, post renovation, which you provide.
Renovation Limitations for an FHA 203k Loan
Note that 203k financing cannot be used for luxury enhancements, such swimming pools or man caves. Proposed renovations must be capped at a maximum of $35,000, as well, for a Limited FHA 203k loan. For homes requiring more extensive or complicated construction, there is the standard 203k program that prohibits habitation in the home until the renovations are completed. Thus, you will need to factor in the cost of temporary housing while the repairs are ongoing.
The standard program also requires that you worked with an approved 203k consultant, who serves as a project manager, including releasing payments to the general contractor throughout the course of the project. An experienced consultant familar with the 203k program is a valuable resource to have, before during and after the project. However, be sure to check with your lender to confirm if they have any special requirements of their consultants prior to searching for one.
Also keep in mind, all 203k loans must start within 30 days of the loan closing and must be completed within six months. Early planning and schedule commitment is essential to pursue this type of financing program.
Summary of Renovation Limitions for an FHA 203K Loan:
- Maximum Cost of Renovation (Limited 203K Loan): $35,000
- Minimum Cost of Renovation (Limited 203K Loan): $0
- Miminim Cost of Renovation (Standard 203K Loan): $5,000
- Maximum Cost of Renovation (Standard 203K Loan): Use FHA 203k Calculator or check with lender
- Latest Start Date After Loan Closing: 30 Days
- Latest Completion Date After Loan Closing: 6 Months
Eligible Home Improvement Projects for an FHA 203K Loan:
- Structural Alterations and Reconstruction
- Modernization and Improvements to Home’s Function
- Removal of Health and Safety Hazards
- Changes that Improve Appearance or Eliminate Obsolescence
- Plumbing, Wells, and Septic Systems: Reconditioning, Replacing or Installing
- Roofing, Gutters, and Downspouts: Adding or Replacing
- Floors and Floor Treatments: Adding or Replacing
- Major Landscape Work and Site Improvements
- Accessibility Enhancements for Disabled Persons
- Energy Efficiency Improvements
Once your loan is approved, funds are placed in an escrow account and you are free to begin construction. Contractors are paid a total of five (5) payments, based on a percentage of completion, which they must define. The 203k consultant, often a representative from the lender’s team, will verify the construction work and a check will be dispersed after the lender’s approval.
If you believe you are eligible, work with a 203k experienced lender, since the process does take longer than regular loans. You will need a lender with significant 203k loan experience to guide you through the process. Start with resource links below. Good luck!
What to Include in a Renovation Contract
Selling Your Home? Curbio Will Pay for Your Pre-Sale Home Renovation Upfront
What to Know About Pre-Sale Home Renovations
A Great Deal on a Home Does Not Require Major Renovations
8 Steps for Starting Your Renovation
Budgeting for a Renovation