Purchasing a new home is an overwhelming process. Fortunately, there are numerous different types of home loans out there. One of these loan options is the FHA 203k mortgage loan. First Fidelis, a mortgage broker in the Kansas City area, wants you to know all about these unique loans before you buy a home.
FHA 203k Loans
While some houses, especially new-builds, are going to be perfect from the moment you walk in, not all properties will be move-in ready. If you know that property you are looking at is going to need some renovations, you might want to consider an FHA 203k loan, because these loans will cover the mortgage of the home as well as home renovations. Unlike many home loans, FHA 203k loans can help with both major and minor renovations. Additionally, this type of loan can also help you refinance your home.
An FHA loan is also backed by the federal government, which means that you can qualify with a down payment that is as low as 3.5 percent and a credit score of 500 or better. Keep in mind that the higher your credit score, the better the loan terms.
Maximum loan amounts for 203k loans is dependent on your area’s FHA mortgage loan limits. However, minimum repair costs must amount to at least $5,000 to qualify for an FHA 203k loan.
Unlike conventional loans, which limit your mortgage to the current appraisal value of your property, these loans base the mortgage value of the property on the lesser of either the current value of the property along with the cost of renovations or 110 percent of appraised value of the property once renovations are complete.
In some cases, FHA 203k loans may allow you to purchase a home that you may not otherwise be able to afford due to the renovations required. Plus, with a low down payment of just 3.5 percent, it is a much more accessible loan than many other types. The low down payment can also help first-time homebuyers who don’t have a lot of money to put down on the property.
The downside of an FHA 203k mortgage loan is that they tend to have higher interest rates. In fact, interest on a 203k home loan can be between 0.25 and 0.375 percentage points higher than a conventional mortgage loan. You will also be required to pay mortgage insurance on these loans. Mortgage insurance requires a premium, which can be as high a 1.75 percent of the base loan, which is added to the mortgage. You will also have to pay an annual premium that ranges between 0.45 to 1.05 percent depending on the size of the loan, the size of the down payment, and the length of the mortgage; this annual premium is paid monthly. The mortgage insurance premium is applied for the duration of the loan unless at least 10 percent is put down on the home. The only way that you can eliminate the premium is to refinance your home loan.
Qualifying for an FHA 203k Loan
To qualify for a 203k home loan, you must meet the following requirements:
- Minimum credit score of 500
- Debt-to-income ratio of less than 43 percent
- Must work with an FHA-approved lender
- Must supply two years of tax returns for evaluation to ensure the ability to afford the mortgage payments
- Property value with renovations must fall within mortgage limits
- Must have a clear CAIVRS report showing that you haven’t defaulted on any loans backed by the federal government, including federal student loans, SBA loans, and previous FHA loans
Renovation Options with FHA 203k Loans
The USDA provides a long list of renovations that FHA 203k loans will cover. This list includes:
- Structural alterations and reconstructions
- Modernization of the home
- Replacing plumbing, roofing, and flooring
- Creating accessibility for people with disabilities
- Eliminating safety and health hazards
- Establishing energy conservation equipment
All renovation work must be done by a professional contractor. DIY renovations are not allowed with this type of loan. Fortunately, the lender will help you manage the costs by only releasing escrow funds to the contractor as the improvements are made and inspected.
If you are interested in a mortgage loan in the Kansas City Metro Area, call First Fidelis today. We are proud to offer a wide variety of loans with a quick approval process to help you close even soon. In some cases, our customers can close on a new home in less than 30 days. To get started, give us a call today at 913-205-9978.