FHA 203K loans are popular and reliable because they are insured by the Federal Housing Authority (FHA). Both 203K lenders and home repair contractors must be approved by the FHA for your loan to meet qualification requirements. While this might seem like it creates extra steps, this is not necessarily true. FHA loans are insured by the U.S. federal government, which means they are easier to obtain for people in financial need than private loans.
Another benefit of an FHA-insured loan is the guarantee all applicable lenders are both vetted and approved by the FHA. This results in the best annual percentage rates (APRs) and loan terms available to you for the type of home purchase and improvement funding you need. FHA 203K loans provide multiple additional benefits as well.
For example, most private loans are available for either home improvements or home purchases, but not both simultaneously. FHA 203K loans allow you to purchase and repair your home under one loan, which combines and effectively reduces the amount of interest you pay on the loan. An FHA 203K loan also has borrower-friendly terms not found in most private loans.
As an FHA 203K borrower you are permitted to use your loan funds to pay for up to 110% of your home’s appraisal value, or, the combination of your home’s price along with the total estimated repair and renovation expenses.
Finally, only a mere 3.5% down payment is required by the FHA when taking out an FHA 203K loan. Private home mortgage loans typically require up to a 20% down payment. This means applying for an FHA 203K loan might save you as much as 16.5% up-front when qualified.
It is important to realize a few additional factors, however. For example, FHA 203K loans generally come with higher APRs than standard FHA loans do. The upside of this is a standard FHA loan still typically offers a lower APR than most other private mortgage loans on the market today. FHA 203K loan funds are also usable for financing as many as six-months of mortgage payments if you are unable to live in your home while it is undergoing repairs.
FHA 203K loans provide more additional benefits. Repairing a new home when purchasing it also increases the equity in the home. Often, the cost of the repairs is less than the increased value of a home once the repairs are completed. For example, if you purchase a fixer-upper home for $110,000, which has a value of $160,000 after your spend only $20,000 in repairs, you have gained $30,000 in equity.