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If you want to purchase a house that needs a lot of repairs before it is ready to be occupied, an FHA 203(K) loan can be used to complete the transaction. Traditional FHA financing requires a property to be in livable condition before closing. Not all properties are move-in ready; some require an extensive amount of rehab work before they are ready to be occupied. For this reason, traditional FHA financing is not available for the purchase of these properties.
If a person wants to purchase a property that needs repairs, the buyer would have obtain financing to purchase the property and then additional financing to complete the repairs. Often, a bank will not grant a mortgage on a house that is in bad shape until repairs have been completed on it, but you cannot have the repairs made until you buy the house. Talk about a catch 22! An alternative is the FHA 203(K) loan program.
The Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD), administers the FHA 203(k) loan program. This program makes it possible to purchase a property and include in the loan the cost of the repairs and improvements.
HUD does not make direct loans to people to buy houses. Instead, approved lenders throughout the country offer this loan because it is insured by the government. An FHA 203(K) loan is available only to people who will occupy the house. It cannot be used to purchase investment properties.
The loan program was designed to help with community and neighborhood revitalization as well as to expand home ownership opportunities. For this reason, the down-payment requirement is 3 percent of the total cost—acquisition and repairs.
In order to get an FHA 203(K) loan to purchase a property, a homeowner must meet requirements outlined by HUD. These requirements are as follows:
- The first step is to find a property that requires repairs before you can live in it. Submit an offer to purchase this house. Your purchase and sale contract must specify that you will be using an FHA 203(k). Your offer should be contingent on your getting approved for this loan.
- The FHA 203(K) loan is insured by HUD and only qualified lenders are approved to offer this loan. HUD can provide you a list of qualified lenders. You will need to submit your loan application to one of them. Since the loan includes rehab costs, you must include a detailed list of repairs that will need to be made and the cost for each repair.
- The lender you have chosen will have requirements that you must meet in order to qualify for the loan. These will usually include minimum credit scores, debt-to-income ratios and proof of income. You will need to meet all of the lender's requirements in order to be approved for the loan.
- Once your loan is approved, a date will be set for closing. At closing, the seller will be paid. The money for rehab costs will be placed into an escrow account that is controlled by the lender.
- After closing, your contractor will begin the rehab work. At certain milestones, the contractor will list work that has been completed. The lender will order an inspection to verify the work has been completed satisfactorily. If the work passes inspection, the lender will be paid from monies in the escrow account.
The FHA 203(K) allows a potential homeowner to purchase a home that requires repairs to bring the property into a livable condition.
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