Foreclosures and distressed homes has represented over 1 in 3 homes sold in the St. Louis and St. Charles Missouri area for the past several years. We have all become very aware of HUD foreclosures, HomePath, REO, Bank Owned, Short Sale, and all the terms and definitions of today's housing market.
What I hear all the time is; 'what is a FHA 203k?', a mortgage loan program that has been around for decades and has helped thousands of home buyers is still a very misunderstood source to help you purchase a new home. I still hear a lot of misconceptions about the FHA 203k that are based on half truths, bad experiences with untrained lenders, and water cooler gossip.
WHAT IS THE FHA 203K?
The FHA 203k Renovation mortgage program is a first mortgage home loan that will provide funds to qualified home buyers to purchase a home plus the funds to fix up, rehab, remodel, update, add-on, just about whatever you want to improve your new home.
Also, if you already own your own home, the FHA 203k refinance will provide the funds through a first mortgage to pay-off your current mortgage plus give you the money to make the improvements to your home that you have been longing to do, needing to do, or simply to do to get your home ready to sell for more later down the road.
HOW DOES THE FHA 203K WORK?
For qualified home buyers the FHA 203k home loan is very similar to any other mortgage loan program, at the time of closing money will be provided to you to pay for your next new home. Plus money is set aside in an escrow account to pay for the pre-determined costs of the work that will start immediately after the completion of your closed purchase transaction.
The pre-determined costs of rehabbing or fixing up your next new home is established during the course of your mortgage application. You, your contractor and a HUD consultant will work hand in hand to help determine what needs to be done to your home to bring the house up to minimum FHA standards, and what you would like to have done to the home to bring the home to at least your minimum standards.
If you are considering the FHA 203k mortgage as part of your plans to purchase a new home I recommend that you start early in finding a contractor who will work well with you and well with the guidelines of the loan program. The FHA 203k guidelines for contractors and how escrow payments are handled do not work well with all contractors. I have established a solid list of St. Louis and St. Charles contractors that have worked very well within the constraints of this loan program, if you would like I would be more than happy to share this list with you.
FHA 203K QUALIFICATIONS
Every lender who will take a mortgage application for the FHA 203k Renovation mortgage will have slightly different qualification guidelines that must be adhered to. Here are a few of the qualification guidelines that we adhere to:
- 640 middle credit score for all borrowers
- 96.5% loan to value
- 3.5% down payment, based on the final loan amount
- 50% or less total debt to income ratio
That's about it, if you have the credit scores, the resources for a 3.5% down payment, and a decent debt to income ratio it is very likely you will qualify for the FHA 203k mortgage.
WHAT ARE THE INTEREST RATES AND COSTS OF THE FHA 203K?
Interest rates and closing costs vary with all lenders, but one thing I can say with all certainty is that the interest rates on a 30 year fixed rate FHA 203k and a standard FHA loan will differ, the FHA 203k interest rate will always be about .375% to .500% higher than a normal FHA loan.
The FHA 203k is a specialty home loan program that yields a higher interest rate. I feel the reason for this is because FHA knows that the FHA 203k program for most home buyers is a short term mortgage that ends up getting refinanced 6 months later to a better loan program.
HUD came out with a statistic not too long ago that stated that the average home buyer utilizing the FHA 203k loan program will have over 22% equity in their home once the work is completed. This is especially true when you are already purchasing a new home that is listed well below market value, foreclosures, HUD homes, HomePath, etc. Personally, over 60% of my home buyers who used the FHA 203k home loan ends up refinancing to a new home loan, most times to a Conventional mortgage with no mortgage insurance, this can be a huge savings.
Closing Costs? This is a specialy loan program with extra steps and people involved, so expect higher closing costs than the standard FHA mortgage. I usually tell my home buyers to expect about 1.5% higher closing costs than if you had a standard FHA 203b loan.
THINKING FHA 203K, THEN GO WITH A PRO!
Since the surge in distressed home sales a lot of lenders have climbed on the FHA 203k band wagon, their inexperience with the ins and outs of this great loan program has led to much of the misconceptions mentioned before. I closed my first FHA 203k loan in 1998 and close several of them every month, as does USA Mortgage.
If you are going to consider the FHA 203k mortgage as part of your future home buying I encourage you to reach out to only loan officers that are well versed in this program. Having a loan officer and lender that knows this program well, has a ton of experience, and the resources will make your home buying experience more pleasant and easy.