The real estate market consists of new homes, old homes, currently being built homes, and homes that are in such a state of disrepair that nobody wants to buy them. It’s hard for people to commit themselves to a home that will require a huge investment of time and money. But a home that is in disrepair affects more than just that single property. It can drive down the value of all of the homes that come within a close proximity – nobody wants to live next to a home that looks like it was the past residence of a group of orphans or the future residence of multiple ghosts. Because of the effect these homes can have on the market, the Federal Housing Administration came up with a solution. That solution was dubbed FHA 203k. It is a loan specifically created for the fixer upper properties, the properties that are too risky for most people to even consider. In a nutshell, it is a rehabilitation loan.
How the Rehab Loan Works
Typically when a person goes to buy a property, the loan that is secured only covers the amount of the property purchase. If there are any repairs that need to be made, whether they are large repairs, like a remodel, or smaller repairs, all of those expenses will have to come from another source. This is not the case with an FHA 203k loan. These loans can be acquired for the cost of the property as well as the cost of all of the repairs that need to be made to bring the home back up to livable standards. As mentioned previously, they were created for the fixer upper homes so neighborhoods could be improved upon, rather than slowly deteriorating into an irreparable state. These loans don’t have to be gotten with the initial purchase, either. They can be acquired later through a refinance. The funds will need to be used to repair your existing home, but if you don’t have the means necessary to do some major repairs, these loans can really help you.
A Few Things You Need to Know
Because FHA 203k loans have a specific purpose, they cannot be acquired by any random person just looking for a loan. They were designed for home improvement, so you have to show your lender that you are going to use the money to improve the home. How would you go about doing this? By getting an appraisal from an approved appraiser and presenting the loan officer with documentation outlining your plans of improvement on the home. Bear in mind that not all improvements are approved for funding through this program, but most of those you might have in mind are. These improvements include:
- Conservation of energy (energy efficient windows, appliances, etc.)
- Major renovations that may include additional rooms or finishing a level or basement
- Remodeling the kitchen or the bathroom
- Making the home more friendly for the disabled
- …And more
This loan is also limited in the structures it can be used on. It was specifically created for structures that were designed for no more than four families. It can be used for tear downs but the original foundation has to stay in place, and it can be used to move a home from one foundation to another. The biggest requirement, as with all FHA loans, is that the property has to be the main residence of the person holding the loan. These were designed to improve neighborhoods and get people in nice homes, not as a tool for the big time investor.
After you’ve determined what repairs need to be made on the property and gotten your appraisal done, you’ll need to begin to prepare your paperwork. Because of the nature of this loan, it does require more paperwork than your typical loan would. There are professionals available who you can hire to help draft the paperwork, and the fee they charge can be added to the loan.
An FHA 203k loan can be a great resource for you if you’re looking to improve your existing residence or you are okay with purchasing a fixer upper. Just remember, if you do choose to secure one of these loans, be smart with your money and don’t pour more into the property than it will ultimately be worth in the end. A home is, after all, an investment, one which you do not want to be upside down in from the start.