If you enjoy taking on big projects and want to save some money when you're ready to buy your first home, purchasing a fixer-upper may be the right move. Fortunately, there is a mortgage loan option available that could help you afford such a property: the 203(k) loan, also known as a rehab loan.
Here's what you need to know about rehab loans before you apply:
How It Works
The point of the 203(k) loan is let you buy a fixer-upper and make repairs as soon as possible, rather than purchasing the house and then saving more money over time before you can start on the home-improvement process. There are actually two types of rehab loans to consider.
With the streamlined 203(k) loan, the home improvements can cost up to $35,000 and cannot be structural in nature. This might include replacing your carpet, upgrading your countertops or installing new windows. If you need more serious repairs for the home, you can get a standard 203(k) loan, which typically lets you spend more $35,000 on structural repairs. So if you need to add a bedroom or bathroom, finish a basement or remodel the home in general, the standard 203(k) loan may be right for you.
Regardless of which rehab loan you choose, once you find the house you want to buy, you can start the process of getting a loan by talking to contractors in your area and getting bids for the work. This way, you can show your mortgage lender how much it will cost to make the home habitable. Note that repairs need to begin within 30 days of closing, and they must be done within six months. If the repairs end up costing less than expected, the remaining money will be put toward the principal balance of the loan.
How to Qualify
The Federal Housing Administration (FHA) backs 203(k) loans, so the requirements are about the same as FHA loans. This means you don't need to have a great credit score, though it's still good to have a score of 620 or more if you want a low-interest rate. In addition, your down payment could be as low as 3.5 percent, which is especially helpful for first-time home buyers who don't have proceeds from a prior home sale to go toward the down payment.
Just note that while it might be fairly easy for you to qualify as a borrower, not all properties qualify, as it may cost too much to make some fixer-uppers habitable. This is why you need to get bids from a few contractors before you apply for a 203(k) loan, as the lender will want to make sure the amount you borrow does not exceed the potential value of the home. Additionally, you must intend to live in the home, not sell it as soon as you're done with repairs.
If you want to find out more about rehab loans, or if you are ready to begin the process of applying for one, contact Contour Mortgage today to learn more.