Use the FHA 203(k) loan to Buy and Remodel a Fixer-Upper Home

Before Section 203(k) of the National Housing Act (NHA) was amended, buying a fixer-upper home was expensive, cumbersome, and full of home mortgage loan red tape. First, a real estate appraisal had to be performed, then the buyer’s credit approved had to be approved, as normal.

The next part of the process wasn’t user-friendly at all. The mortgage funding was broken up into interim and permanent home mortgage loans. Initially, the prospective home buyer had to obtain a loan for completing the renovation and repairs required to bring the dwelling up to standard. Along with this, another loan had to be secured to cover the cost of the dwelling.

These 2 interim loans were typically offered at a fairly high interest rate which made the purchase impractical for many people. The next step is to complete the repair work required to bring the home up to snuff. Once the work had been signed off on, the buyer would then have to obtain a normal long-term mortgage.

How the FHA 203(k) Loan Changes the Game

The idea behind the change was to simplify the process and make it more affordable. The buyer now jumps right to the step of acquiring a fully-insured long-term loan. This instrument includes an escrow fund for the repair work built into it. The loan itself can be either a fixed or an adjustable rate mortgage (ARM loan). It’s important at this point to have a good grasp on how much it would cost to replace the home after the repairs are done for the the homeowners insurance policy.

But there are qualification criteria to meet. As with any other affair that the government gets involved in, the bureaucrats spend a lot of time structuring the rules.

  • It must be a 1 to 4 family dwelling.
  • It must be at least 1 year old.
  • A home that is existing elsewhere may be moved onto another mortgaged plot, but the loan proceeds for the structure to be move may not be released until the foundation on the new plot has been approved and the structure has been secured to said foundation.

Types of Renovations Excluded from the Repair Escrow

  • Structural damage such as foundation cracks.
  • Major remodeling; this is most likely to protect from cost overruns.
  • Landscaping.
  • Removing a load-bearing wall.

But the good news is that the new homeowner can save money buy doing some of the work personally rather than hiring building contractors. What’s the upside of that? The homeowner may not be paid any labor wages out of the repair escrow, only the building materials are covered, resulting in more bang for the buck.