What is a 203k Mortgage and is it for Me?

You’ve looked at  a home that seems to be in the perfect location for you, great schools for the kids, and the price is right. But… it seems to need a little (or a lot) of work. A 203k mortgage may be exactly what you need!

You will want to have the home inspected. A home inspector will help you evaluate the condition of the home, including the roof. A 203k loan is an FHA product. Standard FHA loans have strict guidelines about the condition of the home you’re buying. The home has to get an inspector’s approval for livability and the health and safety of the occupants, including things such as working windows, unbroken stairs, working appliances and a working heating system. 

If the home you want to buy doesn’t meet FHA standards and you still want to buy it, you’ll need to find a way to pay for repairs. An FHA 203k loan can be an excellent option if you don’t have the extra cash to renovate a home.

FHA 203k Loan Basics

An FHA 203k loan allows you to wrap the costs of your renovations into your home loan. The loan amount is based on the purchase cost and the estimated renovation costs, so you’ll need a contractor to do that estimation. You’ll also need to qualify for the payments on the larger loan amount. For instance, if you’re buying a home for $200,000 and it needs $25,000 in repairs, you’ll have to borrow $225,000.

You will need to be qualified for an FHA loan. So, your credit score, income, assets and job history have been reviewed and deemed acceptable. Your only obstacle at this point would be if the new loan amount and payments pushed your debt-to-income ratio too high. The interest rate on these loans is slightly higher than the standard FHA loan rates and you’ll pay a little extra in fees, too. Remember that your mortgage insurance with FHA loans is based on a percentage of the loan amount, so you’ll need to factor insurance into your monthly payments.

If your home needs only a little work, you can do a streamlined FHA 203k loan for up to $35,000 in repairs. You can’t do structural work or any luxury improvements with this loan, but most renovations can be financed this way. If your repairs are more costly, you’ll need a traditional FHA 203k loan, which requires supervision by an FHA-approved inspector.

Either way, if you’re buying a home that needs work, consult a lender who is experienced with FHA 203k loans to see if this loan program suits your financial plan.