First-time homebuyers often find the home they want in the best neighborhoods. The only problem is the house sometimes needs a little work. If you run into this situation, your best bet is to apply for a 203k loan.
Buying a home is one of the greatest investments anyone could ever make. Homes build equity over time. The more of the home you own, the more equity becomes available.
Equity gives you future buying power, especially if you have children. You can use that equity to buy a bigger home. You’re also allowed to borrow against the equity to set up 529 savings accounts. This helps you pay for your children’s college education.
Thinking of buying a fixer-upper for your first home? Make the right financial decision. Read on to discover the pros, cons, and everything in between about a 203k loan.
What is a 203k Loan?
A 203k loan helps you get the home you want plus a little bit more to fix it up. The Federal Housing Administration offers this loan, which is often referred to as a Rehab Loan.
The most common name for it is the FHA construction loan.
The loan helps you finance the home and whatever needed repairs or improvements the home needs. It’s important to keep in mind the house can’t be a total bust. If it’s too run down, the lender may deny the loan.
The home you choose must meet livability standards. That means it must be safe. Fairway Mortgage is a great place to start for this.
The Major Pros
There’re some major advantages to getting this type of loan. First, FHA Rehab loans offer considerably low down payments. Most FHA construction loans require deposits less than five percent of the amount of the loan.
That’s a plus, considering the average down payment is 20 percent.
Although the loan finances two aspects—home and rehab—you’re required to make one payment. That one payment covers the mortgage payment and rehabilitation costs. When tax season rolls around, you can write off the interest.
Another major benefit is you get to hold on to your savings. People often save for years so they’ll have money on hand for home repairs. With an FHA 203, you don’t have to dip into your savings for that.
With any type of loan, there are some downsides. Don’t think you can skip out of hiring a professional for the rehab. The FHA 203 doesn’t permit DIY.
You have to go with a reputable contractor who’s on the approved list.
A lower down payment means more money for mortgage insurance. Don’t get surprised when the lender requires a mortgage insurance premium upfront. They may also require additional yearly insurance costs. insurance costs.
Also, there’s no such thing as a quick sale with 203 loans. The closing is a long, drawn-out process. This a federal loan with lots of paperwork and approvals. Expect to stay in your current living situation for a while until the loan goes through.
Buy Your Fixer-Upper
Don’t shy away from the home you want, even if it needs a few repairs. The 203K loan is a great solution to getting the home you want and the money to fix it.
Let us give you some restoration ideas. Check out our decor guide for the latest tips and hacks on all things home.