An FHA 203k loan helps people finance both the property and the remodeling project. Lenders verify the property and the planned upgrades before issuing these loans. This is an excellent way to acquire homes with intentions of improving and flipping them for a profit. The greatness of the 203k loans is that you can buy and fix a new house in one only transaction.
So how does it work? What is the process?
As you can tell, the other benefit from the 203k loan is that it is easy to execute, therefore, the borrower will build equity very fast since it is not a complicated process.
The big question is, who is eligible?
Well since the 203k loan is a sub-type of the FHA loan and if you qualify for it the process even easier. And if you haven't applied for an FHA loan the procedure is also easier than with a typical lender.
The requirements are as follows:
Fico: FHA, as we know, gives priority to households with low credit scores, although some lenders can require a score of 620-640 to qualify for a 203k loan. But even so, this is a much lower loan than found conventionally.
Down Payment: With FHA borrowers are required to a very low 3.5 down payment which is based on the property price plus the cost of the project.
Debt and Income ratio: Debt-to-income ratio (income and debt payments relation) is a variable that lenders will evaluate. An estimate is that 43% of income should go to house payments and other debts.
Loan amount: Borrowers can ask for up to 110% of the property's value after repairs or ask for the residence's purchase price plus repair costs. This comes in handy for households that do not have liquid cash. Just make sure you stay within your region's FHA loan limits.
Occupancy: Remember that you are required to live in the property in order to get a 203k loan. Fixing a property with the idea to sell it in the short term will not be considered your primary home.
Nationality: FHA loans are unfortunately only available to U.S citizens or lawful permanent residents. Proof of nationality will be required.
203K loans have some restrictions on repairs that should be noticed by borrowers before applying and starting a project. They are as follows:
- Minor landscaping.
- Add a luxury amenity like a tennis court, barbecue area, or swimming pool.
- Projects that will take longer than 6 months.