The process of homebuying can swing from exciting to stressful in about ten minutes. You begin by looking at beautiful houses and imagining your family’s future to realizing the massive amount of paperwork necessary to secure a loan. Unfortunately, the homebuying process does require a great deal of work, but can be incredibly rewarding in the end.
When you are looking to buy your first home, the number of options available can seem overwhelming. Just hearing the word “mortgage” can leave you feeling confused and disinterested. Fortunately, it doesn’t have to be this way! The FHA 203k mortgage loan is one of the best options for first time home buyers. In this article we will break down the meaning of this title and figure out if it is the right option for you.
In order to understand this loan, we must begin with the first acronym. FHA stands for the U.S. Federal Housing Administration. In 1934, the FHA was established in order to aid Americans in their pursuit of home ownership and improved living conditions. The FHA has since helped in housing over 40 million Americans and, in the 1940s, was especially instrumental in helping vets find homes upon their return from active duty.
In 1965, the FHA became what it is today; a government backed program that allows people with less than exceptional credit or large downpayments to make home purchases. Managed by HUD (Housing and Urban Development), the FHA works particularly hard to ensure housing needs are met for the elderly, handicapped, and low income Americans.
Perhaps the most brilliant aspect of FHA is that it is entirely self-funded (with the exception of the 2013 bailout). Operating costs are covered by the collection of mortgage insurance through the very home loans they help people secure. FHA then offers decreased risk to lenders if a loan should default, allowing lenders to offer loans to what would have been ineligible individuals.
FHA and You
All of this history is great, but how does the FHA relate to you? An FHA loan guarantees that you will have a downpayment of less than 3.5% as well as help you stay in your home should future payment problems occur. You are guaranteed a lower-cost option, even if you have imperfect credit. FHA is ideal for first-time homebuyers, as well as lower-income families.
While the FHA is more than willing to help you out with a loan, they do have their limits. Most mortgages cannot be above $271,000, though in some pricier areas they may run as high as $729,000. Research your area and potential benefits before you apply if you have a specific home in mind.
Now it’s time to break down the funky numbers at the end of this loan title. In essence, the 203k is a renovation loan program that allows you to buy a home and perform repairs on one mortgage. Commonly referred to as a “rehab” loan, the 203k allows homes that are in disrepair to be purchased by lower-income individuals and renovated by professional contractors.
The reason the 203k is such a fantastic program is that, in the past, many banks would not approve a mortgage on a home that needed repairs, but repairs couldn’t be done to a home unless you had purchased it. This veritable “catch-22” was nullified by the 203k program, allowing homes in disrepair to be brought up to snuff and occupied by families and individuals.
For many lower-income families, looking at homes under a certain price point is their only option, but they may lack the funds for immediate repairs or improved living situations. 203k builds a quote for your home repairs before you close and holds the funds in escrow for the contractor upon completion. Provided everything is approved, you can quickly have your home fixed up and move in, while only facing your basic mortgage payment on a monthly basis!
203k loans come in two varieties. The standard 203k is meant for homes that require a great deal of work and fixing and may be incredibly costly; while the Streamlined 203k is for repairs up to $35,000 that are less involved. For most homes, the Streamlined 203k is the best option for saving money and moving in quickly.