Most homebuyers are turned off at the sight or even the thought of a buying a fixer-upper, a foreclosure or an older home today. However, educated and informed homebuyers are utilizing the FHA 203k loan to buy their home and fix it up with no additional out-of-pocket expense.
The FHA 203k loan is a tool that savvy homebuyers, successful contractors, real estate and mortgage professionals have been using since 1978. An FHA 203k loan is very similar to the traditional FHA loan (known as the FHA 203(b) loan). The only real difference is that with the FHA 203k loan, the homebuyer is adding money to their mortgage balance to finance any repair/improvement costs.
Whereas the traditional FHA loan requires that certain repairs be done before the home is purchased, the FHA 203k loan allows the homebuyer to purchase their home and complete the repairs/improvements after the transaction closes. The other traditional FHA qualifications (appraisal guidelines, seasoning rules, credit qualifications, etc.) still apply. But with the FHA 203k loan, a homebuyer can fix up his/her home and not have to worry about the additional out-of-pocket expenses for the repairs/improvements.
There are two types of FHA 203k loans: the Standard (aka the Full or Rehab) and the Streamline. The FHA 203k Standard/Full/ Rehab allows for structural modifications, additions, landscaping, architect and engineer contracting and requires the use of a 203k Consultant. The FHA 203k Streamline, on the other hand, will not allow for structural modifications, landscaping, etc., and has a maximum repair limit of $35,000. For both the FHA 203k Standard/Full/Rehab and the FHA 203k Streamline, contractors are paid in a series of draws requested from the lender (max. 2 for the Streamline and typically 5 for the Standard/Full/Rehab).
The FHA 203k loan is a great option for many reasons (just to name a few):
• Less competition to buy a particular home because fewer homebuyers want to purchase fixer-uppers, foreclosures or older homes that are outdated
• Better opportunities for great financial deals on a home purchase
• Allows buyers to purchase properties that may not meet FHA standards and do the fix-up, rehab, improvements AFTER the home is purchased.
• Ability to fix up or add personal improvements to make a house into a home with no additional out-of-pocket expense
• Can be used to do personal preference changes that are not required by FHA (flooring, painting, kitchens/baths, additions, landscaping, windows/doors, etc.)
• If offer is presented properly to seller, it could be the strongest financed offer in competing offer situation
• Sellers do not have to fix-up, rehab, improve a property but instead allow the buyer to use an FHA 203k loan, which allows the buyer to fix-up, rehab and improve the property using the buyer’s own style and design.
The FHA 203k loan also has potential drawbacks:
• No investor purchases; only owner occupant purchasers and qualified nonprofit groups allowed
• In a competing offer situation, it can be one of the weaker offers if not presented properly
• Additional contract contingency that may be undesirable to uninformed sellers
• Extra time involved with escrow periods (typically an additional 15–30 days), getting contractor bids, submitting additional
paperwork to the lender, etc.
• Foreclosure property Asset Managers (sellers of REO’s) may not be familiar with the FHA 203k loan
• Potential challenge with finding qualified and experienced loan officers, real estate agents and contractors for the FHA 203k loan
The FHA 203k loan program improves the real estate market because it requires a property to actually be improved, not just purchased. Because of the improvement requirement with the FHA 203k loan program, real estate values are increased, which helps other homeowners in the same neighborhood, invigorates communities, creates work for contractors and commerce is conducted by the purchasing of goods and services. Simply put, the FHA 203k loan program improves everything associated with it.
With the US Treasury stating that more foreclosures are coming to the market and Fannie Mae and Freddie Mac also stating that they have approximately 100,000 unlisted properties in their inventory, fixer-uppers could be prevalent in our coming market. Therefore, the FHA 203k loan is an excellent and viable option and will continue to be for quite a while for purchasing fixer-uppers because it allows homebuyers to finance the repair/improvement expense into their mortgage, which can be tax deductible.