If you’re looking for a fixer-upper, an FHA 203(k) loan may be right for you.
For many potential homebuyers, having a turnkey house that’s ready to move into immediately is the only way to go. However, increasingly more buyers want to get more house for their money while also opening the opportunity to customize a home to their specific style.
When you’re looking to get more house within your budget, you may be looking at properties that require remodeling.
If you fall into this category, the Federal Housing Administration’s FHA 203 k loan program may be just what you need to make your dreams a reality.
What is an FHA 203(k) Loan?
An FHA 203(k) loan allows borrowers to combine the cost of purchasing a home that needs renovations with additional money to cover the remodel.
This arrangement works for both the lender and the borrower, as it provides a more affordable option with better terms for the home buyer while giving lenders the extra security of the FHA backing the loan.
Types of 203(k) Loans
There are two main types of 203 k loans in Texas: limited and standard FHA 203(k) loans.
Limited loans have less strict requirements but also have their drawbacks. With a limited loan, you can borrow up to $35,000 for your remodel. However, this money is not useable for major structural repairs.
A standard loan opens up more cash but also has its restrictions. Standard loans have a minimum amount of $5,000. Unlike limited loans, you can use a standard loan for structural changes and upgrades.
However, you must hire a HUD consultant to monitor the renovations to ensure all FHA efficiency and structural standards are met.
Project Eligibility
When looking at an FHA loan in Texas, remember the specific rules on what properties are eligible for funding.
These projects include basic surface replacements or upgrades. Upgrades include adding or installing floors, installing gutters and downspouts, improving the sewer or plumbing system, and landscape improvement.
More involved projects are also eligible for these FHA loans. These projects include, but are not limited to, installing a septic system, replacing roofing, and making improvements to the home that improve its overall energy efficiency.
It’s important to note that these loans help address more pressing problems, such as structural issues that represent potential health and safety hazards. You can use your FHA 203(k) loan to make the home accessible to people with disabilities.
Borrower Qualifications
Along with property requirements, borrowers must also meet personal qualifications for FHA 203(k) loan approval. Similar to a traditional FHA loan, borrowers must prove they are financially capable of meeting monthly payments on the loan.
For a FHA 203(k) loan, borrowers must have a minimum credit score of 500. However, lenders may require a higher credit score if other areas of your application are weak.
Like traditional FHA loans in Texas, borrowers need at least a 3.5 down payment.
Applicants with credit scores less than 580 will need to put a 10% down payment to qualify. If you are unable to raise these funds, state down payment assistance may be available.
The total amount of the loan will be capped at a maximum, depending on the county where the home is located. For some counties, loan amounts can range up to around $800,000, while other counties may max out at $350,000. Your lender can direct what specific maximum is available.
How to Apply for An FHA 203(k) Loan
You can apply for an FHA 203 k loan at any FHA approved lender. When you meet with a lender, you will need to the necessary paperwork to show that you meet the minimum requirements. Examples include pay stubs, W2s, and bank statements.
You most likely will not qualify if you have a foreclosure on your record from the last three years.
Benefits and Disadvantages of 203 (K) Loans
The obvious benefit of this FHA loan program is how accessible it makes the loans to those without a lot of financial resources or with poor past credit histories. Interest rates are also typically lower than you may find with more traditional loan products with the same qualifications.
Interestingly, the loan money can help cover mortgage payments while you remodel the home if the structure is deemed uninhabitable.
The disadvantage of this FHA loan program is that you will have the additional cost of a HUD consultant if your renovations are extensive.
You can’t use the money for an investment property, similar to traditional FHA loans. A final disadvantage is that FHA loans require mortgage insurance. Make make sure to include these in your payment calculations.
