Buying and Renovating Real Estate — The FHA 203(k)

Because of the reduced price, older homes in need of repair and/or upgrades create great buying opportunities especially for first-time home buyers.

However, the problem with buying a home in need of repair lies with the home financing.  Most lenders will not lend on a home that is in poor condition.  As a result, “handyman specials” are typically purchased by those that can pay “all cash” to acquire and renovate the home.

For a first-time buyer with limited assets, this can prove to be a major roadblock.

The FHA 203(k) loan program was designed by HUD to address this issue and make the purchasing of older homes a great buying opportunity for everyone.

203(k) — How It Is Different

Most mortgage financing plans provide only permanent financing. That is, the lender will not close the loan until the condition and value of the property provide adequate loan security. When rehabilitation is involved, the improvements must be finished before a long-term mortgage is made.

This leaves two options for the buyer;

  1. Pay cash for the property and avoid home financing
  2. Obtain a temporary loan to purchase the home, a construction loan to complete the repairs, and a permanent loan to pay off the first two loans

However, with the 203(k) loan, first-time homebuyers now have a third and affordable option.

Using the 203(k) loan, the borrower can get just one mortgage to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work.

The most attractive feature about the 203(k) program is that a home buyer only needs 5% down to purchase the home, which includes the purchase price and renovations. (It should be noted here that the FHA 203(k) loan is for owner occupied homes only, not investors).

Here's a simplified example of how the 203(k) loan works.

Let's say you locate a home for sale in need of repair or modernization. To purchase the home, the seller is asking $240,000.00. After further review, you and your contractor determine that there will be an additional $50,000.00 for repairs and upgrades. Therefore, the total cost to purchase and repair the property is $290,000.00.

Using the 203(k) program, you will receive one loan for 95% of the total cost, or in this example $275,500, to purchase and repair your new home.   

You can learn more about the FHA 203(k) loan program by attending the next Homeownership Now Event.  To register, click here, or contact your local HUD office for a list of approved 203(k) lenders nearest you. 

This information is provided courtesy of My Way Home member, American United Mortgage Corporation.  For more information call 1-800-555-203(k).