There are plenty of opportunities in real estate every day. Even if you’re in the market for a home for yourself and you’re not a real estate investor, you can search through online home listings and see the potential in a whole slew of various homes.
The old saying in real estate is “location, location, location.” What this means is that the location of your home matters the most, and everything else falls in line after that. You can update your home to make it more modern, fix problems, or make it more suitable to your tastes. But one thing you can’t ever do is pay for a better location for the home once you’ve purchased it.
Think about it. Have you ever toured a home for sale and thought “this would be the perfect home if only it were located closer to my work … or to my kids’ school … or to the center of town?” Or think about why homes located on the water are so high in value, even if the home itself isn’t the greatest. It’s because location matters, first and foremost.
For potential homeowners who have a vision and the wherewithal to lead a large project, a home renovation or fixer-upper could be a wonderful investment to get you into a home you otherwise couldn’t afford if it were already completely finished. But how can you afford to buy a home and do all the renovation work on top of it?
The simple answer is a 203(k) renovation loan.
What Is a 203(k) Loan?
A 203(k) loan is a type of mortgage that allows you to finance not only the purchase price of the home, but funds a pot of money you will use for planned and approved home renovation projects. A 203(k) loan allows homeowners to borrow up to 110% of the after-improved value of the home to pay for home fixes, upgrades, and safety hazards.
Of course, you don’t have to take the mortgage for the full amount you are allowed, but the parameters of the program provide you with the opportunity to do so if your home remodeling projects are more extensive.
What Can You Use a 203(k) Loan For?
A 203(k) loan can be used for a variety of approved home renovation projects, from upgrades, to repairs, to modernization items. You’ll have to use outside contractors to do the work that you’re borrowing the money for, and these contractors and the work they do will be approved and monitored by your mortgage company.
Some of the projects that could be completed using a 203(k) loan include:
- Structural repairs and reconstruction (for Full 203(k) only, not Streamline)
- Replacement of plumbing, heating, air conditioning, and electrical systems
- Elimination of health and safety hazards
- Flooring, tiling and carpeting
- Landscape work and energy conservation
- Changes for improved functions and modernization
As you can see, there are a wide variety of projects that you can finance through a 203(k) loan. The home you buy doesn’t have to be falling apart or bursting at the seams to be a qualified home improvement project under this type of mortgage. This can allow you to take advantage of the lowest home sale prices of not just typical fixer-upper projects and homes that need a little TLC to bring them into the modern era, but also the vast number of foreclosure and short-sale homes that are on the market.
To be able to take advantage of such an opportunity by other means would either require you to have a lot of cash on-hand, to take a separate loan that could have a higher interest rate and/or lower limit than a 203(k) mortgage, or be able to do most of the work yourself.
Why Use a 203(k) Loan?
A renovation loan is not the only way to make improvements to your home, of course. There are plenty of other options out there. The most obvious option is to use cash that you have on-hand to pay for the improvements. However, you may not have a lot of extra cash available if you’re making a large purchase such as a home.
Another option would be to find an alternate means of borrowing the money. If you don’t already own a home, your options would be somewhat limited to financing the renovations on credit cards or taking out a personal loan. Each of these options typically comes with much higher interest rates than mortgages do, so you’d end up paying more for the same work over the life of the loan. In addition, credit cards and personal loans may have a lower cap on your spending, limiting the size and scope of your home improvement projects.
On top of the possible financial benefits of using a 203(k) loan, there can be advantages to financing your renovations through a mortgage company. Not only will a trusted mortgage lender provide payment organization and assistance for renovation loans, it will also supply an added layer of security when welcoming a contractor into your home. Once you’ve selected contractors, the mortgage company should vet and approve the contractors who are performing the renovations to ensure they have previous work experience, a full understanding of the disbursement schedule, and are licensed and insured to perform such work.
Whether this is your first home with your spouse, or your forever home for your family, a lender can ensure the contractor you use is well-versed and experienced in not only the contracting business, but also the renovation industry as a whole.