FHA 203k Loans

What is an FHA 203k Loan?

Mortgage lenders will only finance a property once they are confident in the value of the property.  This provides them with the time required to determine the exact value on the collateral that they are going to accept in return for providing you with a mortgage. When your home requires repairs, the buyer will need to obtain conventional financing before they are able to obtain the long-term mortgage. Thanks to the FHA 203k, it helps to address this issue for those looking to purchase a home.

Function of an FHA 203k Loan

The purpose behind a 203k mortgage is to help provide you with the three main components that are required to finance a home that requires some fixing up: initial financing, the funds you need to perform the repairs and the long-term mortgage on the property. All you need to do as the homebuyer is secure one loan to cover all three components. This prevents you from having to secure three separate loans on the property. Not only are you going to save a lot of hassles and headaches down the line, but you will also eliminate the potential difficulty in securing a loan on the home upon completion of the repairs.

Structure of an FHA 203k Loan

For those who secure the FHA 203k loan, it is a guaranteed loan. It comes from private lenders that are qualified through FHA. The FHA then turns around and guarantees the loan, meaning you will never have to worry about whether you are insured against any default on the mortgage. If you cannot continue to make your payments, the FHA will turn around and purchase your loan from its delinquency status. There is a relatively minimal degree of risk associated with this type of loan for the lender.

Guidelines for Obtaining an FHA 203k Loan

Even though the FHA works alongside through who have low income or small down payments, they do have exceptionally high credit standards. If you currently have any outstanding tax debts, defaulted on a prior installment loan or government loan, you are probably not going to qualify for their loan. Regardless of whether you have a short credit history or not, you cannot have any negative activity on your credit report to get a loan under the FHA 203k option. The piece of property that you are planning to purchase will also need to qualify for the loan.

Benefits to Getting an FHA 203k Loan

If you do end up qualifying for the FHA 203k loan, you will be able to fly through the process of rehabilitation with ease when compared to that of a private loan. You will already know what your terms are on your mortgage right from the beginning instead of having to wait until the rehabilitation is completed to get an idea what you are going to be financing. This makes it much easier for those who want to work the mortgage into their budgets right from the start.

Risks to an FHA 203k Loan

Even though there are benefits to the 203k loan, you also need to be aware of the risks involved. One of the biggest risks is the fact that you will have limitations on the types of improvements you want to make on your home. During the time that the property is being renovated, you can expect a number of inspections to take place to ensure the final results are going to meet the standards FHA has set in place. Since there is a government agency involved, you can expect these loans to take longer for financing to be completed. There are also a lot more regulations on the property, final product and any plans for adjusting the current state of the home.

It is imperative that you take the time to learn about the loan for which you are applying. Don’t just jump into a loan without understanding all of the pros and cons of the underlying mortgage. Take the time to learn whether this program is going to work for you by examining what it is that you want to do with the property that you are planning to purchase. Once you understand all of the rules, regulations and restrictions on the FHA 203k loan, you will be able to make an informed decision on purchasing the home of your dreams.