Who Is Eligible?
To qualify for a 203(k) home improvement loan, you must intend to live in the house. The program is not available to investors who plan to “flip” the home once repairs are complete. Potential borrowers must also submit a repair estimate that details the cost of renovations and explains how the changes will bring the structure up to current building code requirements. If the project requires structural repairs, you must also supply architectural drawings. Although some people have the knowledge and experience to prepare these highly technical reports on their own, most buyers hire a builder or consultant to prepare these documents. Contractor fees for this service range anywhere between a few hundred to a couple thousand dollars.
Borrowers must also be capable of making a 3.5 percent down payment. The down payment is calculated based on the cost of acquiring and repairing the property.
Additionally, you must satisfy the requirements for any borrower applying for an FHA loan. Specifically, you need a decent credit score, a steady income, and the ability to make monthly mortgage payments on time. Although your credit score does not have to be perfect, you should maintain a score of at least 580 to qualify for a 203(k) loan.
There are actually two types of 203(k) home improvement loans. The first type, which is referred to as a “regular” 203(k) loan, is intended for homes that require structural repairs. The other type is known as a “streamlined” loan, which applies to properties that only need non-structural renovations. Your contractor can help you determine which type of loan you require.
You Can Do-It-Yourself
If you spend a large chunk of your free time surfing home improvement channels or you’re particularly handy with a wrench, there is good news. FHA guidelines do not require home buyers to hire a professional to make repairs under a 203(k) home improvement loan. On the other hand, the FHA does require do-it-yourselfers to complete the repairs in a workmanlike manner. Additionally, the renovations must be finished within six months from the date of close. Home owners are also prohibited from using loan money to reimburse themselves for their own labor. If you hire a contractor, however, you can use the funds to pay for those services.
Although 203(k) loans have been available for decades, they were something of a secret in the mortgage industry for many years. As foreclosures increased and homes sat empty and neglected, however, many savvy buyers have discovered these home improvement loans as a way to snag a great deal on a fixer-upper with a lot of potential.