If you have been riding around town looking at potential homes, you have likely encountered a common phenomena. You either find a fabulous place that is just out of your price range or you find an affordable home in a great neighborhood that needs some work. Not, oh, we can paint the walls and put down new carpet kind of work. No, this place needs some, can someone give me a sledgehammer and let me knock down two walls kind of work. Thankfully, the FHA 203k Loan specializes in that exact kind of loan.
Not a Purchase Loan and Not a Construction Loan
The FHA 203k is not a purchase loan nor a construction loan; it is both. FHA
will allow people to borrow enough money to buy the home AND add enough to the loan in order to make major repairs. The loan does not allow extravagant expenditures such as adding gold plated door knobs to the front door or a $35,000 chandelier to the dining room, but most everything else is allowed. New roof, new heating and air conditioning, new appliances, new flooring, new paint, bathroom remodel, kitchen remodel and the addition of another room are all possible with the FHA 203k program.
Obviously, you need to talk to a mortgage lender and get pre-approved for the home loan. Second, you will need to find a home that falls well below your affordable purchase price. Third, ask your friends and family to recommend you to a good home contractor. Then, ask the contractor to visit the home with you and the real estate agent so you can discuss what you would like to improve on the home. The contractor can draw up a formal bid and submit it to the mortgage lender. As long as the improvements add enough value to the home that the total price of purchase and repairs is less than or equal to 96.5% of the improved value, VOILA, you have a possible 203k eligible home.