As the old adage says, “nothing truly lasts forever”—even bank loans. Many real estate agents have come to rely on specific loan programs, which may cause them to miss out on a substantial amount of sales. It can be a big mistake to take loan programs for granted and assume they will always work for your clients.
Today’s buyers want properties that are in good condition and ready to occupy. If they can’t find decent properties, they won’t buy at all. Of course, the modern buyer who wants this beautiful home also wants it in an equally beautiful (and affordable) price range. The problem is, as you know, these standards are completely unrealistic. Many of today’s clients fail to realize they cannot have a home that meets every single one of their wishes. This attitude, in turn, only creates additional stress for the home buyer and especially for the agent trying to find them a home. Even those who may be interested in buying a “fixer upper” may not have the funds necessary to purchase the home and take care of its repairs.
That’s where the FHA 203k comes in. You have more options for you buyer and they have the opportunity to tailor a home to their wish list. The majority of real estate professionals can take advantage of it to make their job easier, provided they know how to utilize it. Keep reading to learn more about what an FHA 203k home loan is and how it can benefit you and your client.
Defining the FHA 203k
The federal government originally set up the FHA home loan system in the late 1970s to make it easier for home buyers to obtain a home and make necessary repairs. Prior to the release of this program, a home buyer would have had to deplete their savings account to accomplish this goal. An FHA 203k loan grants buyers the ability to not only buy a piece of real estate, but also revamp or make minor tweaks to the real estate, as soon as possible. Repairs typically begin as soon as the property has been purchased. In exchange, the home buyer must pay back the loan over a thirty year period.
Greater Success With Less Hassle
The biggest roadblock to purchasing a home, for most buyers, tends to be the amount of repairs or renovations they will have to make after the buying process. Real estate agents of all experience levels have had to work around specific requirements and reasons as to why a “perfect” home is anything but. However, the truly “perfect” solution can easily come in the form of an FHA 203k loan, which can help home buyers tackle even the most complicated renovations. With the help of expert private mortgage lenders, home buyers can use their FHA home loan to:
- Add or update the home’s security system
- Change, remove or add carpeting
- Make the home more accessible for people with disabilities
- Paint the home’s walls
- Update or add new appliances to the kitchen
- Attach a garage to the home
- Touch up the basement area
- Update or expand the kitchen
- Add or replace hardwood floors within different rooms
- Enlarge or renovate the bathroom(s)
- Make any other necessary additions to the home
All About the Expenses
Imagine a client who has set aside $150000 for their home purchase. However, they also want to complete some renovations—adding hardwood flooring and renovating all of the bathrooms and the kitchen. When it comes to FHA home loans, clients will be expected to pay at a rate of $25 each month per loan increase (which, in itself, rises in $5000 increments). The planned renovations will boost the client’s payments to $150 each month. On top of this, there are also around $30000 in bids.
Clients are not required to have their down payment on hand. They can request the 3.5 percent amount from a government assistance program or ask a member of their family to provide them with the money in gift form. In fact, the only payment a client is 100 percent responsible for are the appraisal and inspection fees. The government will automatically take back any and all money not used toward repairs after all of the work is finished.
What Types of FHA 203k Loans Are There?
There are generally two different varieties to choose from:
- Full – Clients will need assistance from an HUD consultant for this form of FHA 203k loan. They are only for extensive projects—those where the structure of the home must be altered, or totaling over $35000 in terms of overall expenses.
- Streamlined – Any repair or renovation project costing $35000 or less can qualify for a streamlined loan. No HUD consultant is needed.
The Appraisal Process
Home buyers who opt to use an FHA 203k home loan, gain the unique advantage of needing far less appraisals than average. More specifically, buyers just need to complete one appraisal alone following the completion of their repairs and renovations. From there, the mortgage can be totaled based on:
- The property’s new value, which will increase due to the repairs
- The repair expenses and how much the property was worth prior to repairs
How to Determine Whether a Property Qualifies
Private mortgage lenders will generally grant 203k loans to primary residence multi-units, townhomes, and single family residences. Special conditions apply for those looking to finance a condominium, with one of them being FHA approval.
How to Secure an FHA 203k Loan
- Research local private mortgage lenders and their application requirements.
- The client is granted pre-approval based on repair expenses and the current price of the home.
- The negotiation process begins. The client must request an FHA refinance mortgage loan alongside an agreement regarding the home’s current price.
- Bids will arrive from contractors and inspections will begin.
- The client must select and confirm a bid.
- The appraisal process begins.
- The underwriting is confirmed by all parties involved.
- The deal closes. This may take between one and two months.
- The client may begin their repairs. They will have a full year to finish these repairs if they’ve chosen a full loan, or six months for a streamlined loan.
How to Apply for a Loan From the FHA
- The amount of homes a client has already purchased and the client’s overall income do not affect their ability to be approved for a loan.
- The client’s credit score must sit at 620 or below. They are permitted to apply with a different form of credit.
- A home buyer’s debt to income percentage can be no larger than 50 percent.
- A seller may make concessions no higher than 6 percent.
- The buyer may work with cosigners if they wish.
- There are no restrictions on contractors to handle the repairs, provided they have full licensing.
Interest Rates
One of the most commonly discussed topics when it comes to seeking any type of loan, but especially for refinancing mortgage loans, is interest rates. With an FHA 203k loan, interest tends to rise at a rate of 0.25 percent larger than the standard FHA loan interest. However, this is all dependent upon the private mortgage lenders the client has chosen to work with.
How to Eliminate Issues Before They Arise
- Research carefully. The ideal lender will have handled several cases involving FHA loans.
- Avoid contractors with little experience and/or no licensing.
- Do not set impossible goals regarding deadlines and other relevant matters.
How to Market FHA 203k Loans to Potential Clients
- Organize a get-together for local contractors and share how FHA 203k home loans may be profitable for their businesses.
- Explain to parents how deciding to cosign on an FHA 203k loan can help build their children’s futures, especially if they are college-bound. They can rent out the obtained property to their peers, increasing cash flow to help pay for their important necessities.
- Discuss the benefits and freedoms that FHA 203k loans offer to local homeowners. They can use the loan to either renovate their pre-existing residence to make it more enjoyable to live in or to make it more appealing to potential buyers.
- Ask your clients who become successful borrowers if you may take photos of their property—one prior to obtaining their loan, and one after all their repairs have been finished. You can then share your photos on social media and/or your business website as advertising.
Liberty Mortgage is the ideal source for anyone interested in obtaining and transforming a “fixer-upper” home. Reach out to us to learn more about how we can help home buyers to more easily obtain the FHA 203k loan they need.