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Everything You Need To know About Prospect Mortgage 203K Loans

Updated on December 12, 2013

Rehab a Home with HUD's 203K Loan

A type of federally insured mortgage product for individuals who want to rehabilitate or repair a damaged home that will become their primary residence. In addition to the funds to cover the purchase price of the house, the FHA 203(k) loan provides the money needed for repairs and related expenses as part of the loan.

This loan has a low down payment requirement compared to private-sector mortgages and puts rehab projects within reach for individuals who otherwise could not afford them. Supporters of this type of loan say it helps improve communities and broadens home ownership opportunities for individuals; critics say that it's a risky loan product that isn't offered without government underwriting for a good reason.

Read the Prospect Mortgage disclosure here.

What is an FHA 203k Loan? - Intro to 203K Loans

FHA 203k loans are mortgage products offered by the federal government that allow individuals to fix heavily damaged or dilapidated properties in order to make them habitable. With only 3.5% down, people can secure a loan that accounts for all repairs, time for renovations and a contingency fund for unexpected costs. There are two types of 203k loans: regular is for homeowners who need structural repairs, and streamlined is for those who only need non-structural repairs. A property is not eligible if the construction was completed within the last year, or if the loan is to be used for luxury improvements. Single-family homes are eligible if they are not being used as an investment; the loan recipient must be the primary occupant.

Either one or two appraisals are needed for a FHA 203k. An after-improvement value is mandatory, but in some cases the borrower must also get a current value of the property without improvements. HUD-owned properties are eligible for 203k loans, and they don't require an as-is appraisal. The lender may request a Property Disposition from the Department of Housing and Urban Development in order to obtain the maximum value of the loan, or they can request a separate appraisal if that is not sufficient. In addition to structural home improvements, home owners can get a loan for 100 percent of the costs of energy-efficient upgrades under the FHA's EEM program. These enhancements, however, must be cost-effective in order to quality, and there are dollar maximums.

Once the 203k loan has been approved, the funds are released to pay off the seller and then put into a Rehabilitation Escrow Account. Funds are released from the escrow account as repairs and improvements are made and inspected by HUD officials. The lender is given the task of determining the disbursement schedule. While most 203k recipients will use the funds to hire contractors for improvements and upgrades, borrowers can renovate the property themselves if they can demonstrate expertise in the type of repairs they are making. A borrower, however, cannot pay himself for his own labor, he can only use the loan money to pay for materials.

After renovations are completed, the borrow can use any extra funds to make improvements that are approved by the guidelines set out by the FHA. If the funds aren't used for such a purpose, they will be used to pay down the principal of the loan. The time allowed for a renovation is written into the loan agreement, but the total time for renovations must not exceed six months. If the home is not habitable during repair work, the standard 203k loan allows for six months of mortgages. Borrowers who get a streamlined 203k loan are expected to be able to live within the property during repairs.

Learn About 203K Rehad Home Loans

203K Home Loans

The idea of purchasing a fixer-upper and turning it into a person’s dream abode can often be so perfect because every part of the home is made according to their specifications. Unfortunately, the reality can be a bit harsh. When an individual realizes how much they will spend to remodel, they often become fully aware that they cannot afford it. They may also find out that a lending company will not give them a loan because their dream home is categorized as uninhabitable. This is where 203K loans become very useful.

A Unique Loan Program

The FHA 203K loan lets a person refinance or purchase and rehabilitate real estate with one loan closing. The property’s projected rehabilitation costs are often placed in an escrow account. It is then disbursed as work is inspected and completed. The loan amount depends on the lower end of the projected market value after the purchase or repair price along with renovation costs.

Features of a 203K loan

Before obtaining a 203K loan, it is important for people to know their features and how these loans can help them. One of these features is that they have flexible underwriting guidelines. Up to a maximum of six months of mortgage payments can be included in their 203K loan if renovation is very extensive and the underwriter determines that a person cannot live in the house during construction. This often includes insurance, tax, interest and principal. With this, people do not need to make double housing payments when their home is uninhabitable.

Many types of real estate are also eligible. Single-family residences such as attached and stand-alone homes and houses in PUDs or planned unit developments are 203K eligible. Even though some special rules and restrictions apply, people can use their 203K loans to refurbish and purchase condominiums, mixed-use properties and multi-unit properties.

A Long List of Benefits

When an individual decides to obtain a 203K loan, there are a number of benefits that they can enjoy that are not found with other types of financing options. One of these benefits is that it allows people to purchase foreclosure properties that need repair.

The majority of HUD foreclosure real estate can greatly benefit from a 203K loan. Another advantage is that it allows people to buy a home that does not need repairs and finance the price of cosmetic repairs. At the same time, these loans can be easily used to convert a single family home to two to four units and vice versa for zoning purposes. Buyers can also utilize 203K loans to complete modernization and repairs when they buy the property with cash. Aside from that, up to 110 percent of the after-improved value of a home may be utilized as a basis for mortgage calculations.

Easy Qualifications

A 203K loan requires applicants to meet some important criteria. People must have the capability to pay a minimum down payment of 3.5 percent. At the same time, they should have a credit score of 640 and above. Aside from that, they must not currently have any other type of FHA loan. Unlike other kinds of housing loans commonly found on the market, people do not have to be a first-time homebuyer to qualify.

Maximum Loan Amounts

The maximum amount that an individual can obtain from a 203K loan for a single purchase is the sales price plus 96.5 percent of its after-improved value or improvements. For a refinance, it is often 97.75 percent of the after-improved value. People should also remember that these amounts are often subject to the usual FHA loan limits that vary by market. They currently range from a minimum of $271,050 to a maximum of $729,750 for a single-family property.

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