Those looking to purchase or refinance a home and renovate it have additional mortgage options compared to those who just want to do the former. For example, the 203(k) loan is a mortgage insured by the Federal Housing Administration (FHA) and offered by FHA-approved lenders that is designed specifically for this reason.
Like any other loan, there are both pros and cons to getting this rehab mortgage. Here are some key points to consider:
It could help you make money in the long run.
Purchasing a home is supposed to be an investment. Ideally, you want to be able to make money off of the property when you go to sell it down the road. However, fixer uppers pose an even greater return on investment (ROI) because you could significantly increase their value by making critical upgrades and repairs. With the help of a 203(k) loan, or another type of renovation loan for that matter, you’ll have the ability to both buy and renovate a home. Plus, if the property is in dire need of a makeover, you may be able to get it for a lower purchase price, depending on its location.
You can customize your new home to fit your personal style.
Relating to our last point, this rehab mortgage enables you to make changes to a property that will likely increase its value. However, doing so will also make the space feel more like your home than the previous owner’s, as you can choose paint colors, flooring, cabinetry, counter tops and other materials to your liking.
The qualification requirements are more forgiving.
Compared to other types of mortgage loans, 203(k) loans tend to be easier to qualify for because of their affiliation with the FHA. While the government agency doesn’t actually provide buyers with the funds, it does insure the loan—making it possible for certain lenders to offer such financial assistance, as aforementioned. Similar to other FHA loans, the requirements you must meet are typically more lenient.
For instance, your credit history, while still important, doesn’t play as much of a pivotal role in the evaluation process. A lender will assess your score, as well as your ability to pay back the loan, but it isn’t as much of a contributing factor. However, if you want to qualify for a conventional mortgage loan, you’ll like need to work on improving your credit if it isn’t up to par before applying.
Only a 3.5 percent down-payment is required.
FHA loans, including 203(k) loans, typically require borrowers to pay only a minimum of 3.5 percent down. This is significantly lower than other types of mortgages, where sometimes a 20-percent down-payment is required. As a result, you’ll have more money in your pocket after closing, which you can then use in other helpful ways, such as furnishing your new place.
You won’t spend all your money at once on renovations.
Since you'll be using the funds from the 203(k) loan to upgrade your new or current home, you won't be spending thousands upon thousands of dollars all at once to make these improvements. Instead, you'll spend the money in stages, making payments on a monthly basis until you’ve refunded the lender.
There’s a limit on the number of units in the home you purchase.
This rehab mortgage permits buyers to purchase both single- and multi-family homes, but there are some stipulations. Specifically, you cannot purchase a home that has more than four units.
Only certain upgrades are covered.
There are two types of 203(k) loans: streamline and standard.
The former, which is also referred to as a limited 203(k), covers non-structural repairs, such as new floors, appliances, plumbing, electrical work, as well as kitchen and bathroom renovations. These changes must stay under a certain amount of money, depending on where you live.
The latter, on the other hand, covers structural repairs. Foundation work and damage caused by natural disasters, such as a flood, are just a couple examples. Because these renovations tend to be more serious, and thus, more costly, standard 203(k) loans have higher loan limits.
Consequently, if you’re looking to make other upgrades that aren’t covered by this rehab mortgage or if your renovation plans put you over (or under) the dollar limit, the 203(k) loan may not be the best choice for you.
It’s not ideal for people who want to buy a move-in ready home.
While some people may jump at the chance to renovate and customize a home, there are others who would prefer to purchase a property that doesn’t need any work. This way, their only responsibility would be to move in. Buyers who aren't interested in making any major changes to their next home would benefit from considering other loan options.