Financing a Fixer with a 203K Loan

For many the idea of buying a home that needs TLC is appealing, but the financial reality of coming up with a down payment and money for work to the home can be daunting. However, with a 203K loan, you can actually finance the cost of the repairs and upgrades, provided that the total loan amount is less than the projected value of the home once it’s been fixed up.

If you’re a first-time homeowner that’s feeling overwhelmed when thinking about your fixer-upper to-do list, here’s some information that will be helpful for you.

Planning for a 203K Loan

The first thing to establish when applying for an FHA 203K loan is exactly what you want to repair or update, and how much each of these things will cost. Reach out to a contractor that can place bids on the different items that need work. You will also want a home inspector to come through to prioritize what needs to be fixed.  Knowing what needs to be fixed will make asking for and choosing different contractors much easier. It also will prevent you from having to make multiple revisions to your documentation for health/safety items that might need work.

Here are a few things to keep in mind:

1. Write everything down. If a home inspector or contractor makes a bid or estimate, you’ll want it in writing so that there is no confusion or unexpected changes later.
2. Make sure you are following safety guidelines and building code. For example, if your home was built before 1978, you’ll need an EPA or state certified painter to do any work on chipping or peeling paint if lead based paint had been used.
3. No family can be a contractor for a 203K loan. This keeps the transaction impartial.
4. Do the math carefully. There’s a lot of potential work being done, and knowing the accurate total ahead of time makes requesting the 203K loan much simpler for you and your lender.
5. Keep the seller’s agent in the loop! Getting bids on the property’s repairs might mean multiple trips to the house before financing is fully secured, so be prepared for the possibility of competition in a hot market, and working around the seller’s schedule.
6. Generally speaking, the items that can be approved for repair on the house must add value, and do not include luxury items like pools. Things like solar energy can be added by certain lenders, but to what extent will vary.

The Loan Itself

Once your bids and estimates for work on the house are complete, you’ll want to bring this with you to your lender. The amount that can be lent for repairs might be restricted if the loan is a 203K limited loan, and it must follow the county guidelines. Just as you would with a regular home purchase, you’ll still need the loan to be approved during your escrow period.

Speaking with lenders prior to applying for a 203k loan will give you a better idea of how much you can afford to do in repairs and what your overall monthly mortgage payment would be. While you are financing the cost of the repairs, that cost is paid back as part of your monthly mortgage payment. The bright side is that these repairs that the 203k loan finances will add value to your house, and sturdy new construction for you right after moving in.

Is This The Right Loan and House For Me?

Before deciding whether to pursue a 203K loan, ask yourself if you prefer to purchase a home that’s already been fixed up or one that you can make your own, using your vision and a lender’s up-front money. For some, the prospect of transforming a home is exciting, the chance to live what they see on TV’s house-flipping shows, even though they lack liquid capital. An older, classic home gives a buyer the opportunity to have vintage features but new construction, and a prime location in the greater Long Beach area.

If you’d like a referral to a trusted lender, or have any questions about purchasing a home, give us a call at 562.896.2456.