https://forwardmtg.com/30-year-fixed-rate-mortgage/ In most cases, when buying a home, you will need to make a few repairs. If you would like to buy a home that needs renovations because it is more affordable and later handle the renovations, you may have seen that the FHA 203(k) is suitable for you, but do you know everything you should know about the loan?
What is a FHA 203(k) Loan?
It is a mortgage insured by the government that borrowers can use to buy and renovate a home that should serve as a primary residence. The government introduced the loan to support home ownership, especially for low-income households.
How a 203(k) Loan Works
This loan encourages families with median to low income to buy homes requiring repairs as it offers enough finances to buy a home and renovate it. The FHA 203(k) mortgage loan includes the buying price of the home as well as the cost of renovation- both materials and labor. The loan can either have a fixed or adjustable rate.
The loan serves a dual purpose of enabling the borrower to buy a home and renovate it instead of applying for two loans separately. Separate loans often come at a higher costand are harder for a lender to approve.
When you take out the loan, the renovation fees will be deposited into an escrow account and will only be disbursed to the contractors after the renovations are complete. According to the loan terms, the renovation should take six months or less.
You can only qualify for the 203(k) loan if you intend to buy and renovate the property to make it a primary residence. So, house flippers, realestate investors, and applicants already owning a primary residence do not qualify.
Additionally, the renovations to be done should strictly be handled by a licensed handyman. If the borrower qualifies as a licensed contractor, they could handle the repairs using the money allocated for renovations but will not be compensated for their labor.
The Two Types of 203(k) Loans
You can apply for either of the two types of 203(k) loans- the standard 203(k) or the limited 203(k). the standard 203(k)loan does not have a cap on the repair cost and is ideal for extensive repairs or structural works on the new home.
The borrower can borrow a minimum of $5,000. The funds will cover a lot of repairs,e.g., kitchen remodeling, plumbing, landscape improvement, flooring, HVAC repairs, bathroom remodeling, adding access for disabled persons, improving health or safety standards, etc. however, it does not include luxurious renovations, e.g., adding a new swimming pool or tennis court.
On the other hand, a limited 203(k) loan is used on a home that doesn’t need a lot of renovation, and the renovation cost is set at a maximum of $35,000. It is suitable for a home that doesn’t need structural renovation, e.g., landscaping or adding new rooms. The hoke should be habitable during the renovation period.
Pros
One of the major advantages of the FHA 203(k) is that youcan qualify with a lower credit score and don’t need to pay a hefty down payment. Since the loan is designed for low- and medium-income households, the credit score requirements, and down payment are low. The FHA 203(k) loan also makes it easy and convenient for a borrower as it combines a home purchase loan with a renovation loan. Since it is backed by the government, the interest rate on loan is lower compared to other loans, and it helps offer temporary housing as you repair your home if it needs structural renovation.
This will likely be your biggest monthly cost as a homeowner.
Morrison Calgary be sure to discuss with your mortgage broker to ensure you are getting a mortgage rate and terms that work best for your financial situation.
