Shopping for a home in today’s market can be a daunting task. Not only must you find a place that’s a great fit for your family, you also have to do it under budget and with a limited selection. Some homeowners are choosing to forego many of their wish list “want to haves,” but others are going a different route: they’re using an FHA 203k loan to finance a less-than-perfect dream home.
Choosing to go the FHA 203k route isn’t the solution to all things it might seem, otherwise everyone would be doing it. It is a great solution for specific issues, though, and could be the right move for you.
What Is an FHA 203k Mortgage?
In short, an FHA 203k mortgage allows you to buy a home that’s got some glaring imperfections, but still do it with a low down payment and under the less strict regulations of the FHA program. If you find you qualify for an FHA loan but can only find houses that might be difficult to get approved through this program, the FHA 203k could be a solution.
Like a standard FHA loan, FHA 203k loans do ask that a home meet safety and livability standards, but these can be achieved after closing, but prior to occupancy. For example, if the house you’re interested in needs central heat and air added so that there’s heat in every room, it might be a candidate for an FHA 203k, even if it wouldn’t normally fly under FHA standards.
Pros and Cons to an FHA 203k Mortgage
There are many advantages to using an FHA 203k mortgage instead of a traditional FHA loan:
A wider selection of homes to choose among. In this market, it can be hard to find a house that is both in your price range and that will meet the standards of FHA programs. The 203k eliminates at least some of the headache, and allows a wider range of homes, provided the cost of repairs to meet those standards can be wrapped into the mortgage. This is determined by the value of the home after repairs are completed.
Potential cost savings on housing by choosing a fixer-upper. Houses that need a little something often appear with steep discounts, especially in markets where buyers are largely looking for something they can immediately move into. If you can wait for repairs to be made, then you may be able to save a lot of money on housing and potentially gain a little equity.
But it’s not all roses; there are also some tricky things about using a 203k:
In most cases, repairs must be hired in. Although some repairs may be able to be DIYed, because of how the program is handled, overwhelmingly, repairs under the FHA 203k program will need to be completed by contractors. This ensures that the repairs are made in a timely manner and that they’re done correctly, but considering the sometimes long wait times for tradespeople in some areas, it could cause a long wait for you before you can move into your new home.
Enough potential equity has to be present to cover repairs. This is not a tool to create a lot of equity out of thin air. Most of the repairs done under the 203k will be things that either contribute to efficiency (like new windows and insulation) or safety (like a new roof or deck repair). Because of this, you can run into issues where the home you’re interested in isn’t going to have enough wiggle room in the post-repair equity to actually cover the needed repairs under the 203k rules. In that case, you may still not be able to qualify the home for the program.