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How is a FHA 203K Different from Other Home Loan Programs

May 7, 2016

How is a FHA 203K Different from Other Home Loan Programs

We have all heard of fixer upper homes – the homes that you would not live in unless you made major changes to it. Maybe it was a foreclosure and the previous owners destroyed the home, leaving nothing behind – not even the kitchen sink. Or maybe the home is just so old and has never had any updates done to it that no one could possibly live in it until it was rehabbed. The main problem that both of these examples has is that no lender is going to approve financing on them. Every property must pass an appraisal and an inspection, which no house that has been destroyed in foreclosure proceedings or that has never been fixed up will pass. This leaves you without financing, unless you look to the 203K loan.

Financing for Purchase and Rehab

The 203K loan provides you with the funds to purchase the home at its value right now as well as the funds to fix it up over the next few months. All that is required is for you to put down 3.5% of the purchase price of the home. If you do not have that money, you can get it as a gift from a friend or family member. The rest is handled by the loan consultant, lender, and contractors, with you working as their partner. The only alternative to this financing would be paying cash outright for the property and then getting loans or paying cash for the updates that the home needs in order to make it livable.

Saves Money

Many people think that the 203K loan is too expensive because you are financing the cost of the repairs that need to be done and you are paying on them for the next 30 years, unless you opt for the 15 year version. But, chances are the rate you are going to get on the 203K loan is much lower than any rates you would get on a personal loan or credit card as they are not secured by the house, which is how the mortgage lenders are able to provide such lower rates than you would find anywhere else.

Make Necessary and Desired Repairs

One of the largest benefits is being able to provide the home with not only necessary repairs that will bring the home back up to code and insurable by any mortgage company, but also changes that are desired. This means if your house is up to code and you have money left in the budget, you can write in changing out the floors to put in hardwood floors or to change the color of the interior or exterior of the home. As long as the home will meet the proper requirements and there is money left in the budget, lenders will approve changes such as these, allowing you to make the house exactly what you want it to be in the long run without spending any money out of your pocket outside of the closing costs for the loan and the down payment.

Getting Help for the Cash at Closing

If you cannot afford the closing costs that are associated with the loan you can ask the seller to contribute the costs as a part of the contract. This is done by increasing the price of the home slightly, if the seller requires it, and then he gives you a credit for the closing costs. The 203K loan guidelines allow the seller to contribute up to 3% of the loan amount towards the closing costs of the loan.

Filed Under: FHA Loans

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