FHA Loan Options: Combined Purchase and Repair Loan Available

by Karen Lawson
June 17th, 2010

FHA offers a great opportunity for home renovation enthusiasts with its combined home purchase and repair loan, also known as the FHA 203(k) loan. This mortgage loan program provides funding for buying and repairing a home based on the home’s estimated value once necessary repairs have been completed.  For those seeking to save money by buying a home in as-is condition, this FHA loan program can save time by eliminating the step of getting a separate loan for repairs. It also solves the dilemma of trying to finance a property in sub-standard condition.

FHA 203(k) Loans: Financing for Buying Damaged or Foreclosed Homes

The glut of foreclosed homes available in many areas present problems for mortgage lenders, who are overwhelmed with real estate owned (REO) inventory, and communities suffering the negative consequences associated with unattended vacant homes. Mortgage lenders typically sell foreclosed homes in as-is condition, and many of them require major repairs and renovation. The FHA 203(k) loan program benefits to homebuyers and communities alike; as each rehabilitated home represents increased property tax revenue for communities, and the potential for reducing crime and preserving property values by eliminating a nuisance property. Transitioning foreclosed homes from vacant and unattractive crime magnets to renovated family homes is a win-win for home buyers and their neighborhoods.

FHA 203(k) Loans: Two Options Available

FHA offers two options for its purchase and repair loan program. If the property you’re buying requires structural repairs, the standard 203(k) loan is available for the lesser of the home’s current value plus repair costs or 110% of the home’s repaired value. For homes that don’t require structural repairs, a modified 203(k) loan is available for the as-is value plus a maximum of $35,000 for repairs.  As with other types of FHA loans, a down payment of 3.5% is required and you must meet FHA guidelines by providing proof of income, assets and current credit scores.

FHA Guidelines: Allowable Repairs

Before you apply for an FHA 203(k) loan, its important to learn what types of repairs are allowed under FHA guidelines. Although its possible to complete many types of repair and renovations with a 203(k) loan, FHA draws the line at “luxury” repairs such as installing outdoor kitchens, tennis courts, and swimming pools. In addition to meeting FHA requirements for a mortgage loan, you’ll need to submit documentation of planned repairs and their estimated costs. FHA lenders familiar with 203(k) loans can help with guiding you through the application process specific to FHA 203(k) mortgage loans.

Refinancing with an FHA 203(k) Loan

Homeowners wishing to renovate their homes can also use FHA 203(k) loans. This can help with completing  major repairs, remodeling, or converting your home from a single living unit to a duplex. Start with shopping mortgage and refinancing quotes online, or contacting FHA lenders to learn more about how an FHA 203(k) mortgage loan can help you update and repair your home while increasing its value.

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