For first-time homebuyers who wish to buy a fixer-upper, the FHA 203(k) rehab loan can make their dream a reality. However, to take advantage of this loan and all it has to offer, it’s important for applicants to understand how it works.
The FHA(k) loan is a specific kind of mortgage that the government insures. It enables borrowers to take out a single loan with the intention of either purchasing a home or renovating one. The loan is intended to help cover the repair and rehabilitation of homes that the borrower intends to make his or her primary residence.
There are two types of FHA 203(k) loans for buyers to consider. These include the Streamline 203(k) and the full 203(k). Generally, the Streamline 203(k) loan is the most commonly used for first-time homeowners who want to use the loan to purchase a home.
The Streamline 203(k) doesn’t allow for any structural changes, and borrowers can take out a maximum of $35,000 to finance home repairs. Meanwhile, full 203(k) loans allow for more drastic structural changes, to the point where it’s possible to level and rebuild the home. The full 203(k) loan also comes without a maximum repair limit, provided the loan falls under the local area’s maximum loan limit.
One of the key reasons why first-time homeowners may want to apply for a 203(k) loan is because of the benefit it provides when it comes to equity. The fact is that many homes that require repairs don’t cost as much to repair as the discount on them would suggest. This is because of the low number of homebuyers who are typically willing to repair the home compared to homebuyers who want to simply purchase a home and move into it.
Additionally, it can be hard to receive financing for these homes, as the seller requires either a cash buyer or a 203(k) buyer. In an attempt to appeal to these buyers, sellers wind up significantly lowering the price of the home. Subsequently, buyers pay less for the home and can gain instant equity upon paying for and receiving the necessary repairs.
There are many types of repairs that are acceptable under the Streamline FHA 203(k) loan. These include:
Other potential repairs allowed could include painting, asbestos removal, landscaping, and septic system repair.
A majority of people who qualify for standard FHA loans will be able to apply for 203(k) loans, as long as the amount of the loan doesn’t exceed the buyer’s preapproval to a significant extent. In many cases, it may be best for potential applicants to speak with a professional such as a real estate attorney to determine if they qualify beforehand.
Ultimately, with an FHA 203(k) loan, homebuyers may be able to acquire their dream home at a more affordable cost.
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