Buying and rehabbing a property to eventually sell for a higher price can get you a good ROI. So if you are thinking about making money in real estate by purchasing a distressed property, then applying for Fha 203k loans is a great way to start your home renovation like a PRO.
To help you get started, we will provide a basic guide about this type of loan. We will talk about the lenders as well as who can apply, and what repairs you can do when applying for Fha loans. Moreover, we will cover topics such as the minimum down payment, interest rates, mortgage rates, and much more. So if you are interested to learn more about Fha 203k loans, continue reading.
#1 What Are Fha 203k Loans?
Fha 203k loans are also known as Fha construction loans or rehab loans. The great thing about Fha loans is that the real estate investor can finance the house itself as well as the required repairs needed for home renovation. For example, you are planning on purchasing an investment property that needs a brand-new kitchen as well as a bathroom. When applying for Fha 203k loans, you receive the money to purchase the investment property. Additionally, the real estate investor gets the money needed for home renovation, in our case the kitchen and bathroom.
But how does applying for Fha loans work exactly? Well, it is pretty simple to understand as it is quite similar to the process of regular property financing with some adjustments, of course. Here are the steps:
Step 1: Apply
Step 2: Get Approved
Step 3: Find a Contractor
Step 4: Get Bids
Step 5: Close the Loan
Step 6: Complete Repairs
Step 7: Live in the property for the required time
Step 8: Sell the Property
#2 Who Can Apply for Fha Loans?
This investment property financing method sounds great, but who can actually apply for Fha 203k loans? A 203k is a subtype of a standard Fha loan that supports investors who have almost no chances to be approved by traditional mortgage lenders. Fha 203k loans are the alternative to a standard construction loan. Still, it is easier to apply for Fha loans.
You should know that, when it comes to real estate for beginners, your credit score really matters when applying for a mortgage loan. Consequently, a conventional construction loan requires that your credit score is 720+. However, with Fha loans, you can qualify for a loan with a score as low as 580. However, you should know that some lenders will require your score to be between 620-640. But hey, it is still lower than 720+, right? If your credit score is no good, make sure to read “How Can You Improve Your Credit Score for Financing Investment Properties?”
It is also important to mention that the real estate investor should be ready to pay a down payment for investment property. Luckily, the minimum down payment is not going to be 20%. Typically, Fha loans require 3.5% as a down payment for the investment property of your choice plus the total costs for rehabbing a property. For instance, if the price is $250,000 and the total home renovation costs are $25,000, then the down payment that you need to pay will be $9,625.
So, if you were wondering how to buy investment property with no money down or how to start a real estate business with little capital, Fha 203k loans may be the answer. In fact, you may receive the whole asked sum with a 0% down payment for investment property.
Another major requirement to note: An investor must live in the property for 12 months. So, this type of loan is better suited for a beginner real estate investor, maybe one who is trying out house hacking.
Curious to learn more about Fha loans? Make sure to read “Can You Use FHA Loan for Investment Property Financing?”
#3 What Repairs Can You Do?
Well, there are two types of Fha 203k loans: the standard loan and the limited loan. Before we talk about what repairs Fha 203k loans cover, we should mention that the maximum repair work can cost you approximately $31,000.
With a limited 203k mortgage loan, most of the work you can do will consist of non-luxury, non-structural repairs. For example, such repairs the real estate investor can do include:
- Bathroom and Kitchen Renovation
- Wall Painting
- Flooring Work
- Energy-Efficient Improvements
You are not allowed to perform structural renovation like moving load-bearing walls with this type of loan. Moreover, rehabbing a property by adding a swimming pool will not be approved as well as it will fall into the category of luxury home renovation.
With standard Fha 203k loans, you can do almost everything you want except adding luxury facilities to your fixer upper, of course. So, if you are ready to increase the property’s value, here are a few of the potential repairs that the investor is able to perform on a fixer upper:
- Structural Changes
- Connecting to the Public Water/ Sewer
- Converting a Single Family Home into a 2,3 or 4 Unit Investment Property
You should know that the project for rehabbing a property cannot take longer than 6 months, so make sure you plan well upfront.
Not sure which home renovations to do? Make sure to read “11 Home Renovation Tips to Increase the Value of Your Investment Property.”
#4 The Advantages and Disadvantages of Fha 203k Loans
Advantages of Financing Rental Properties with Fha 203k Loans
Well, the biggest advantage of Fha 203k loans is that the real estate investor gets the opportunity to buy a fixer upper that, otherwise, he/she would not be able to afford with other mortgage lenders. Another great thing is that when purchasing a distressed property, your total repair cost will be covered. Moreover, 3.5% is a really low minimum down payment. Additionally, you get good interest rates. However, this strictly depends on the type of investment property.
Disadvantages of Financing Rental Properties with Fha 203k Loans
Well, the disadvantage of this type of investment property financing method is that not every investment/ distressed property will qualify. Further, applying for Fha loans is not easy. In many cases, it is advised to hire a consultant or an agent who will prepare all needed documents as the process of being approved takes more time than applying for a standard loan.
Some investors might also see the requirement of having to live in the property as a disadvantage. However, when done with house hacking, you can cover your housing expenses and make some rental income until the property can be sold or rented out for a good ROI.
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