FHA 203k mortgage – loan to purchase and repair a distressed home

FHA 203k mortgage – loan to purchase and repair a distressed home

FHA 203k mortgage – loan to purchase and repair a distressed home

Have you ever heard of a home buyer rehab loan?

Many potential buyers don’t realize that they can get a lot more home for their money by buying a distressed property with a 203k loan.

The FHA 203K loan simply includes the cost of rehabilitating a distressed property into the overall home mortgage.

The cost of using an FHA 203k loan, explained in simple terms, is as follows:

When someone buys a home that is move-in ready, they will most likely pay fair market value for that home. If they apply for an FHA loan, their down payment will be 2.5%. Any changes they wish to make to make the house “theirs”, such as changing the kitchen or bathrooms, will be additional costs after the sale and these costs will be borne by the buyer.

For example, a person buys a ready-made home at a fair market value of $400,000.

A similar home in the same neighborhood is also for sale, but this home is distressed and in need of updating and renovation. For this reason, the buyer will pay much less for this property, and with an FHA203K loan, the buyer will be able to repair and renovate the house to bring it up to the same standard as the first home. Generally, this total can be done for much less than the cost of the first home, so the new buyer of the distressed home will have immediate equity in the property. This is also called “sweat equity”.

To explain this, let’s say you paid 80% of the post-renovation value (80% of $400,000), so $320,000, and the property needs $35,000 to restore and repair. The FHA 203K loan will allow a loan amount of $355,000 to cover both the purchase price and restoration or repairs to bring the house up to the same standard as the first house, for example a house with a fair market value of $400,000. The added benefit is, that you can choose your kitchen or other upgrades and customize them to your liking during the remodel/renovation. You now have $45,000 of equity in the house.

The FHA 203K loan is ideal for financing the purchase and renovation/rehab in one loan, plus all the benefits of an original FHA loan.

The above explanation is a very simplified form of this process and there are strict guidelines that you will need to follow when rehabilitating with an FHA203K loan. Be sure to discuss all of these requirements with your lender in advance.

For help getting a listing of distressed homes in Southwest Florida, feel free to visit https://greaterswfl.com/fixer-upper-homes

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