A 203K loan is perfect for borrowers who want to purchase or refinance a property and make renovations to it.
Under the Federal Housing Administration, 203K loans are something worth looking at. But what sets this mortgage apart? That would be discussed in a few moments.
First, let’s cover the basics.
What is the FHA 203K Loan all about?
Like other FHA loans, these loans are quite beneficial for a lot of homeowners and aspiring homeowners.
These loans are renovation loans which would allow borrowers to use home purchase and home improvement costs in one loan.
These are backed by the FHA which poses a fewer risk for lenders. It’s easy to get approved, too. The steps to get a 203K loan is quite lengthy but there won’t be much hassle.
Keep in mind that there are two types of 203K loan: the standard FHA 203K Loan and the FHA Streamline 203K Loan.
First, standard 203K loans are mortgages that do not have a dollar amount maximum and include structural changes.
On the other hand, streamline 203K loans only covers non-structural changes to the property and can only allow a maximum of $35,000 in charges.
And in order to qualify for any of the 203K loan types, the borrower should use the property as his primary residence.
For multi-unit properties, at least one of the units should be occupied by the borrower in order to be eligible and the rest of the units can be investment properties and have it rented out.
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So what sets this mortgage apart?
Among the other things that make this type of loan attractive to interested home buyers, 203K loans allow borrowers to design their home the way they want to without separating costs for purchasing and renovating the property.
Another thing that sets it apart is that appraisal would not really matter. The home needs a value but its issues would not be a factor that would make the loan fail since the costs of any improvements or renovations will be part of the entirety of the mortgage.
What situations are ideal for 203K loans?
These loans are ideal if the property or home you wish to purchase needs an amount of work for it to be worth it. Your lender would add these renovation costs to your amount of the property you wish to purchase.
Also, if your current residence needs some improvements significant renovations, you can decide to refinance through a 203K to cover rehabilitation costs.
Specifically, people usually go for a 203K if they want to modernize their houses, update plumbing and electrical systems, replace roofings, make energy efficient measures, and just about any other renovation measures that the property requires.
Financially, the ideal loan amount for renovations should be at least $5,000. Maximum limits are specified by the FHA depending on the property’s location.
What does this loan require?
Credit and debt ratio requirements for a 203K loan are pretty much close to those of standard FHA loans.
According to them, your ideal credit score must not be lower than 580. But there is also a level of leniency towards this requirement. Those who don’t have perfect credit may also try and qualify. However, standards may vary by lender.
As for debt ratios, general guidelines when applying for a 203K loan are as follows: the ideal front-end debt ratio should not be more than 31% and the ideal back-end ratio can’t be more than 43%.
And like its credit guidelines, these figures could have exemptions as the lender makes the final call on what is their acceptable debt ratio.
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