How to Use the FHA 203(k) Rehab Loan
For these potential home loan applicants, the FHA 203(k) rehab loan or it’s refinance counterpart could be a big help--FHA 203(k) loans are for any homeowner who wants to buy or refinance a property and repair or renovate it at the same time. There is a “big” version of the 203(k) and a limited version for smaller projects.
But some borrowers won’t use an FHA 203(k) rehab loan to do this--why? Because some borrowers want to buy and repair investment properties, which is generally not permitted with an FHA mortgage.
Some finance and mortgage blogs remind borrowers that they technically CAN purchase an investment property (up to four units) IF they are willing to live in one of those units as their primary residence and rent out the unused living spaces to others.
Those who are serious about purchasing investment property often shy away from this--they are “serial” property buyers who will move on to a new purchase at some point and repeat the entire process. These buyers aren’t willing to live in the home purchased and rehabbed with a 203(k) loan.
In general, if you want to buy and live in a property up to four living units large, you can do this with an FHA 203(k) rehab loan.
Some borrowers look at FHA loan limits in their local area but forget that FHA loan limits increase with the number of living units--be sure you know the FHA loan limit for the size of the property you want to buy, don’t look at the single unit FHA loan limits and assume ALL homes have the same limit. Check the number of units--it sounds like an obvious mistake, but it’s an easy one to make.
When considering your 203(k) options, you may be tempted to act as your own contractor. This is fine during the planning stages but as long as you don’t know what a lender will allow you to do in that area, be sure to get estimates for building materials and other things you will need assuming you may have to pay labor costs, too.
Make a budget that accurately covers the expenses whether you do the work or if others are hired to do it for you.
And it’s a very good idea to talk to a lender about the FHA 203(k) loan options in terms of whether to get a “Limited 203(k)” or not. Under the Limited 203(k) you can’t do major structural alterations but there is no minimum expense under the limited program so if you have smaller-scale work to do, the 203(k) may be a good option but be sure you know the details of both the regular and the limited version before you commit.
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