A 203(k) loan is a type of mortgage loan that is guaranteed by the government agency Federal Housing Administration (FHA), which is a part of the U.S. Department of Housing and Urban Development (HUD). It's ideal for borrowers who are looking to do some work—whether cosmetic or structural—to a home they would like to purchase or to the home they're living in now.
FHA 203(k) loans help cover the costs of purchasing a home in need of updating and renovating it. They also aid in refinancing and renovating a borrower’s current home.
While many first-time buyers utilize 203(k) loans, other eligible borrowers who are already homeowners can also be approved. That is, as long as the property is at least one years old, which HUD points out on its official government website, and will be used as their primary residence.
There are two types of 203(k) loans.
Applicants looking to borrow less than $35,000 to finance their home upgrade may be eligible for a limited 203(k) loan. These loans were designed specifically to fund non-structural work.
As HUD explains, homeowners who obtain a limited 203(k) loan, which used to be called the streamline 203(k) loan, "can make their new home move-in ready by remodeling the kitchen, painting the interior or purchasing new carpet." Installing new appliances and updating the electrical system are other possible upgrades.
Standard 203(k) loans are for bigger projects that involve structural work. This includes relocating load-bearing walls, adding new rooms and repairing flood or fire damage.
Borrowers must submit the planned renovation projects to the lender to get them approved.
A mortgage lender will want to know how borrowers are going to use the funds provided to them through the 203(k) loan, since only certain changes are covered. Consequently, part of the process involves the home buyer creating a detailed list of what repairs and upgrades he or she would like to make to the property, as well as how much each item is expected to cost. This should be done with the help of a licensed contractor. A lender will assess all of this information to ensure it complies with 203(k) loan requirements.
Contour Mortgage is an FHA-approved lender that offers 203(k) loans, as well as other renovation loans. To learn more about applicant qualifications and the approval process, contact us today and one of our knowledgeable mortgage loan originators can answer your questions.