Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home.
Simply put, you can purchase or refinance a house that needs some help! Certain repairs are allowed through the program to modernize and improve your home and it is all contained within one FHA mortgage!
This program permits homebuyers and homeowners to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home. Quickly and easily tap into cash to pay for property repairs or improvements, like remodeling the kitchen, painting the interior or purchasing new carpet. Homeowners using this program to refinance can make property repairs, improvements, or prepare their home for sale.
To get a 203(k) loan, you must meet the requirements for a standard FHA loan.
Credit score, credit history and down payment. If you’re making the minimum 3.5% down payment, you’ll need a 580 credit score. If your score is between 500 and 579, you must put down at least 10%. At least three years must have passed since any foreclosures.
Mortgage insurance premiums. You’ll pay upfront and annual mortgage insurance premiums. The upfront insurance is 1.75% of your loan amount and the annual insurance ranges from 0.45% to 1.05% of your loan amount.
Loan limits. Keep your total loan amount below the FHA loan limit in your area. The 2022 loan limit for one-unit properties in most of the country is $420,680.
Contingency reserves. Depending on the size of your project, your lender may require that you set aside up to 20% of the cost of the improvements for unexpected costs that may arise. If you don’t have enough equity to roll them into your 203(k)loan, the lender may require proof you have the cash to cover them out of pocket.
Home value. One unique feature of renovation loans is you borrow money based on your “after-improved” value, which gives you more borrowing power than other types of home improvements loans that only consider your current “as-is” value. An approved FHA appraiser inspects your home, and considers the work plan and cost estimate to determine how much the home will be worth with the completed renovations.
Exploring your options before you make a decision is always the best choice. Talk today with one of our expert loan officers who can guide you through the process toward your new home purchase!