For this blog series, we’ll be explaining what the FHA 203K Renovation Loan program is, it’s main goals, and how to apply. This is going to be a four part series, as we want to make sure you have all of the information on this specific loan program! Just like with the Conventional Loan program, we’ll break this down into 4 parts.
As a disclaimer, this update is going to be VERY similar to the FHA loan program, as this program has similar requirements.
What is the FHA 203K Renovation Loan Program?
The FHA 203K Renovation Loan Program is a mortgage insured by the Federal Housing Administration (FHA) aimed at buying homes that need repair. For Renovation Loans, the FHA provides a grant up to $35,000 to cover the repairs when buying a fixer upper home, and rolls the cost of renovation into the mortgage.
The FHA insures mortgages on single family homes for FHA-approved lenders to protect against losses as a result of a homeowner defaulting on a mortgage.
This also protects the borrower as well, as the Federal Housing Administration would be paying for that default. Due to the combination of affordable low down payments and low fixed rates, the FHA 203k Loan Program is typically used most often by first-time home buyers or borrowers who haven’t bought a home in several years.
In order to apply for FHA 203K loans, the minimum credit score to apply is 500. However, if the borrower has a 580 credit score or higher, they qualify for the 3.5 percent down payment option.
Similar to USDA Home Loans, FHA 203k homes must be safe and sanitary for the home-buyer. This means that there are requirements for water tests, as well as other important inspections that may result in additional tests, like roof inspections or foundation certifications. The costs of these repairs to make the home meet guidelines can be rolled into the mortgage itself.
One advantage is that FHA 203k Loans have more cost-friendly benefits when making the minimum down payment than other loan programs. The caveat to this is that with a down payment of 3.5% comes the need to pay for private mortgage insurance.
Fortunately, private mortgage insurance premiums can be removed upon reaching 20% equity in the home, or by fulfilling lender-specific down payment requirements. In this case, the borrower will need to pay an upfront mortgage insurance premium.
Why Was the FHA 203K Loan Program Created?
The FHA 203k Renovation Loan Program was created originally to create opportunities for moderate income families to purchase their first homes at an even lower price. This program allows borrowers to buy homes that allow a bit of a lower restriction on down-payment requirements and credit score eligibility.
As mentioned before, homes that need renovation are usually listed lower on the market as well. This allows the borrower to start a home renovation project and roll all the costs into the 203k mortgage to get exactly what they want in a home.
The Federal Housing Administration wanted to make owning a home a reality for the middle class at an affordable price. When the middle class moves into a home and settles in areas, this increases the economy of that specific region by more than if people rent in the same areas.
For the next part, we’ll be talking more about Eligibility Requirements and borrower categories.