The FHA 203K loan is the perfect way to purchase a home that needs fixing up. Many people think that they would not need to qualify for such as loan, since they are helping the community by purchasing a rundown home, but the opposite is true. You do have to qualify for the loan, but it the requirements are not as harsh as they would be with a home that was not going through the rehab process. The basics of an FHA loan still exist for this loan and are rather flexible in the end, giving you more opportunities to purchase a home that you can fix up the way you want it to look.
Your credit scores will be pulled in order to determine your risk level. Unlike conventional financing, however, emphasis is not put on the score itself. In general, no lender will talk to you if your score is lower than 580, but an overall evaluation of your credit history will take place for every person. They are looking for responsibility when it comes to repaying your loans. If you have a low score, yet have a good 12-month mortgage history, you could be eligible.
Just like any other loan, the lender will evaluate your income. They usually look at a 2-year history, taking an average of your income over that time period. They will document your income by your most current paystubs that covers a 30-day period as well as the last two years’ worth of your income tax returns. If you are self-employed or on a fluctuating income, your income that is used to qualify for the loan might be lower than you would anticipate, but this is to gauge for those times of the year that your income is lower than others. The lender wants to make sure you are not getting in over your head.
Down Payment and Leftover Funds
The FHA 203K loan is just like any other FHA loan; you need to put 3.5 percent of the purchase price of the home down. The good news is that this money can be gifted from a friend or family member, meaning that essentially, you do not have to put any of your own money down on the home that you are fixing up. If there are funds that are left over after the repairs are complete and the entire process is over, the money can be used to pay down the principal balance of your 203K loan, making it easier to gain back the equity in your home in the long run.
In addition to borrower qualifications are property qualifications. You must live in the property that you are taking the loan out on with the exception of a 6 month period where you can live elsewhere if the home is not livable during the process. The home can be a 1-4 unit property or a townhome, but must be at least 1 year old in order to qualify. The amount of the loan cannot exceed the maximum for your area, which differs for every state and county.
The 203K loan is not hard to qualify for as long as you have decent financial history and a stable employment/income history. Less emphasis is placed on your credit and more is on how risky you look now. The loan does take some more work and should be done in conjunction with professionals that have been through the process before simply to ensure that you are not being taken advantage of in the end.