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What is an FHA 203K?


Many of my new agents ask me what is the difference between a FHA loan, FHA 203k, and how or why would they want one. After explaining it, I decided to post it the most simple explanation I could find. This is from I find their explanations on most any topic  to be simple, inclusive, and easy to understand.


·         Historically, FHA loans were created to boost home ownership sales by decreasing down payment requirements on mortgage loans. As a result, conventional non-FHA loans typically require down payments of 10 percent or higher, while FHA loans can require down payments of less than 4 percent.

FHA loans are federally insured loans that require the buyer to pay an upfront insurance premium at closing, as well as a monthly insurance premium designed to protect the lender from loss in the event of default and foreclosure. Due to the nature of the insurance required to obtain an FHA loan, the government did not -- in general -- want to back loans on properties that were considered uninhabitable; that is, in need of roof replacements, plumbing work or other major repair items.


·         FHA 203k loans allow the buyer to roll in the costs of repairs to rehabilitate the property into the mortgage loan. The formula to do so is quite simple. The bank takes the "as is" market value of the property and adds the costs of repairs to the loan. Upon closing, the repair work is completed and the buyer can take possession of the property.

The minimum amount of repairs required to utilize an FHA 203k loan is $5,000 and the maximum is $35,000. However, this is not considered a second mortgage or home equity or improvement loan. This portion of the loan is added on to the primary note.


·         FHA 203k loans are applicable to single family homes or multiple family dwellings of up to four units. This means that an FHA 203k loan can be used to rehabilitate or repair single family detached properties, condominiums, town homes or small apartment facilities.

In addition to streamlining costly repairs for a property, a FHA 203k loan can be used for modernization of an existing home. This is useful for homeowners who want to update a kitchen or bathroom in a home that they purchase. These loans can also be used for room additions or other home expansion projects.


·         When taking into account loan qualifying amounts on an FHA 203k loan, the purchase price must be less than the sales price after the amount of repair work is finished. The best way to ensure that an FHA 203k loan is approved is to have contractors provide estimates of repairs or updating on a home prior to entering into a real estate contract for purchase. This way, a consumer can be prepared for the total loan amount, knowing that she qualifies for the property after its improved value has been assessed.

Expert Insight

·         Due to the meticulous requirements and nature of FHA 203k loans, consumers should consult an FHA 203k loan specialist. Not all lenders who are familiar with standard FHA 203b loans know how to structure and prepare the necessary paperwork for an FHA 203k loan. Talk to several lenders about their experience with this specific type of loan. If they have little to no experience, they are likely not the right choice to handle a loan this complex.


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