24, May, 2023 | American Eagle Mortgage
An FHA 203K loan, also known as a rehab loan, is a type of loan offered by the Federal Housing Administration. This loan allows you to purchase or refinance a home that needs repairs or renovations. The main benefit of this loan is that you can include the cost of home renovation in the total loan amount, making it easier to finance your home improvements.
An advantage of this renovation loan is that you don’t need all the money upfront. This can be particularly helpful if you’re looking to buy a house in an area with high-priced homes or if you don’t have enough savings to cover the costs of home repairs.
Two Types of FHA 203K Loans
Standard FHA 203K
Standard 203K loans cover repairs such as structural work or extensive repairs. So, the maximum amount loaned is not capped although the minimum amount that can be collected is $5,000.
Some repairs a standard FHA 203K loan covers include:
- Repairs or renovations that require architectural plans or engineering work
- Improvement of health or safety concerns
- Kitchen and bathroom remodeling
- Improvements or additions that need an architectural plan
- Major landscaping work
Limited FHA 203K
Limited 203K loans are used for homes that do not require many repairs. These loan types do not cover the house’s structural work. Also, limited 203K loan requirements state that the house must be livable throughout repairs and renovation. These loans are capped at a $35,000 budget.
Examples of repairs that limited FHA 203K loan covers include:
- Replacement or repairs for heating and cooling systems
- Plumbing and electrical fixes
- Window or door replacements and repairs
- Making the home more energy efficient
- Replacement or repairs on roofing and gutters
Eligibility Requirements
Down payment, credit score, and history
As always, a low credit score will affect anything regarding loans. Your credit score, credit history, and down payment must be within acceptable limits.
If you plan on making a 3.5% down payment, you will need a minimum credit score of 580. Any score between 500-579 requires a 10% minimum. Some lenders have different minimum score requirements, so it is best to check with a loan officer first.
Mortgage insurance premiums
A mortgage insurance premium (MIP) and an upfront mortgage insurance premium (UFMIP) are critical components of all FHA loans. They protect lenders if a borrower defaults on the loan. MIPs do not have a set rate, while UFMIPs do.
The MIP is paid on a monthly basis with the mortgage. UFMIP can be financed into the loan amount, so the borrower does not have to pay it out of pocket at the time of closing.
Unlike how conventional loans can be removed once the borrower reaches a certain level of equity in the home, MIPs cannot be canceled.
Lender Choice
Not all lenders can be hired when it comes to an FHA 203K loan since they must be FHA-approved. Do your research and compare rates, fees, and services among different lenders. More information or Apply now…