The FHA 203K loan is a type of financing that is insured by the Federal Housing Administration. It is a unique type of financing that allows homeowners to obtain both a purchase loan and rehabilitation financing in the same transaction. Before this transcendent loan program, a homeowner had to obtain an initial, temporary loan to purchase the home and a separate rehabilitation home loan to make any necessary repairs. Only after the repairs were complete could the homeowner gain permanent financing for their newly improved home.
FHA 203K: How does it work?
The FHA 203K loan was designed to streamline the process of buying a
home in need of repairs. In order to provide funds for the repairs, the
loan amount is based on an expected future appraised value that takes
into consideration how much value the completed repairs will add to the
current value. Up to $35,000 over the purchase price of the home can be
financed into the loan to cover the cost of repairs.
The contractors chosen by the borrower to do the repairs will receive
the money for their work in two draws. One draw is for 50% of the work
and is disbursed at the beginning of the repairs while the remaining 50%
will be disbursed after the work is completed. The repairs must begin
within thirty days of the closing of the loan and must be completed
within six months. The amount paid to the contractor(s) must be
determined before the loan closes by obtaining written bids on material
and labor costs. The homeowner can do the work himself provided that he
is a licensed and bonded contractor.
What types of repairs will the FHA 203K cover?
Some of the repairs eligible to be completed with the funds from an FHA
203k loan include: roof replacement, electrical or plumbing work,
kitchen remodeling, accessibility renovations, appliance purchases, and
painting. Although many cosmetic renovations are allowed, luxury items
and upgrades are not permitted. Also, any funds needed to repair to any
detached structures, like sheds, swimming pools, and gazebos, may not be
included in this loan amount.
FHA 203K: Qualifications
The FHA 203K program has the same types of eligibility requirements that
exist on any FHA home loan. A homeowner must qualify on the basis of
both credit and income to be eligible and the property must be FHA
approved. As a general rule, the monthly mortgage payment cannot exceed
41% of the borrower's monthly income and most lenders require at least a
620 credit score. Homes that qualify include: FHA-approved condos, 1-4
unit homes, and planned urban development homes (PUDs). The construction
of the home must have been completed at least one year prior to
financing in order for the home to qualify.
The FHA 203K program can be a great tool for any homeowner looking to
renovate or repair his or her home. In a housing market that has seen
foreclosures reach record highs, the FHA 203k loan can not only provide
potential home owners with more opportunities to purchase a home, but
can also help rebuild the housing market by facilitating the
rehabilitation of foreclosed properties.
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