So you are looking for a fixer-upper? This can be a good choice depending on your situation. Homes that need some repairs may have less competition from other buyers – other than possible investors. It does take more planning on your part but it can be a good option. FHA has a 203K rehab loan that allows you to buy, fix up the home and move in.
A rehab loan will allow you to get bids and find a contractor before you close on the home. Then once you close, you can have the work started. There are some pros and cons to a 203K rehab loans. Here are some things you want to know about!
- Great for buying a fixer upper
- Allows you to finance the home and up to about $30,000 in remodel/repair costs
- Only a 3.5% down payment on the purchase and repair costs
- Build equity faster since you can update the home
Here are some on the cons to a rehab loan –
- You can’t do the work yourself, you must hire a licensed contractor
- It will take longer to close
- Not all lenders offer 203K rehab loans
- There will be more paperwork involved
The process is simple although it may not seem like it during the process! You get approved for the loan, find a home, get bids for the work that needs to be done and hire a contractor. Ideally you want a contractor that has done rehab loans in the past. Once you have everything, you will submit the file to the lender, they underwrite it and once it’s approved, you can close. After closing, your contractor will start work. Once the work is done and inspected by the lender, you can move in and enjoy your new home!
There are two types of 203K loans – one is a limited (or streamline) 203k – meaning it’s more cosmetic work. Usually this is for painting, carpeting, appliances, remodeling things like the kitchen or bathroom. It needs to be non-structural work. The limited repair costs are maxed at $35,000 but there is a buffer in the cost of the bids, so usually it’s limited to about $31,000 in actual work. The 2nd type of 203K is the standard 203K. This allows for more work to be done and requires a HUD consultant. You can do major remodels, sewer or septic replacement, improve accessibility for a handicapped person. You can’t add luxury items like a pool, barbecue area or tennis court. The project must be completed in less than 6 months.
There are other ways to remodel a home – using a 203K loan is just one option. For some, it’s a great option. For others, you may want to consider a home equity loan if you have enough equity in the home. There is also a conventional rehab loan that may be a better option – but the best way to know is to talk to your loan officer and see which program is best for you.
Many people run away from homes that need repair. If you find a home that you love, talk to your realtor and loan officer and see if a 203K rehab loan might work for you. It’s a great way to buy a home and get it remodeled the way you want it to be!
Leslie Vanderwerf, NMLS ID#335509, AMEC Home Loans, An Equal Housing Lender, NMLS#150953 – Email – Website
