Homebuyers don't always want to take out an FHA guaranteed loan to purchase a brand new home. For those who want to save money, there are plenty of fixer upper properties on the market. These properties are available for less when they have fallen into disrepair, been through foreclosure, government seizure or are sold by auction.
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Rehab a Home with an FHA 203(k) Fixer Upper Loan
Homebuyers don't always want to take out an FHA guaranteed loan to purchase a brand new home. For those who want to save money, there are plenty of fixer upper properties on the market. These properties are available for less when they have fallen into disrepair, been through foreclosure, government seizure or are sold by auction.

CAN A HOMEBUYER APPLY FOR AN FHA MORTGAGE ON A FIXER UPPER?

Yes. A program known as HUD 203(k) lets qualified buyers purchase fixer-uppers with FHA guaranteed loans, and even has built-in protection for the borrower should the repair and renovation process cost more than expected.

HOW DOES AN FHA FIXER UPPER LOAN DIFFER FROM A STANDARD FHA MORTGAGE?

To apply and be approved, the process is recognizable to those who have taken out FHA loans in the past. A 203(k) has the same kind of application and approval process as other FHA home loans. You need an FHA-approved lender and submit to the usual credit check and debt-to-income ratio considerations. However, with an FHA loan for a HUD 203(k), there are some additional requirements.

WHAT EXTRA PAPERWORK IS REQUIRED TO APPLY FOR THIS LOAN?

Because you must have work done on the property, the borrower is required to submit a detailed list of repairs and cost estimates with the application. You'll need to spend some research time before you complete the FHA loan approval process.

With the purchase of a new home with an FHA loan, the property appraiser does all the work in determining how much the home is worth. For an FHA 203(k) loan, you need to have the entire property evaluated, and get labor and repair costs estimated. The entire list must be broken down so the FHA can easily understand how the work should proceed once the sale is final.

WHAT DOES AN FHA 203(K) LOAN PAY FOR?

Once approved for your FHA mortgage, you proceed to closing with a loan to cover the cost of buying the property and to cover remodeling expenses and closing costs allowed by the terms spelled out in your FHA home loan. The approved FHA loan amount also includes a percentage of the total remodeling costs as listed in your submitted plan. These funds are set aside in case there is extra work required--if you didn't foresee some additional expense related to the repair work, money is already provided for.

WHEN DO I GET THE MONEY?

When you're ready to close the deal, the costs of the purchase are covered, and the remaining funds from your new FHA guaranteed loan are deposited into an escrow account. They can be used to pay for the work done as you rehab or remodel the property.

WHAT ELSE SHOULD I KNOW ABOUT FHA203(K) LOANS?

You may not be able to occupy your new home while you are having it fixed or remodeled. That's why the guidelines for this type of FHA home loan include the ability to include up to six mortgage payments into the cost of the rehab work. The amount of mortgage payments built into the loan must not exceed the number of months estimated to get the work completed. You can't add four months if the work will be done in three.

WHAT IF THE PROPERTY I WANT TO BUY IS LESS THAN PERFECT?

If you meet the FHA's income and other requirements, you can take advantage of lower interest rates and other advantages of an FHA guaranteed loan. You don't have to purchase a brand new property to get the benefit of an FHA mortgage. Ask your loan officer about an FHA-guaranteed 203(k) loan to learn more.




FHALoan is a private corporation, is not a government agency, and does not make loans.