One of the best ways to get into a home that needs work is with a 203K loan. This loan, which is backed by the FHA, enables you to purchase a home that would otherwise not pass the appraisal process. This process which is a mandatory component of any mortgage determines the stability of the home. If there are any structural or hazardous issues with the home, it will not pass the appraisal and will therefore be ineligible for any type of financing. The only way you could purchase the home would be with cash, unless you obtained a 203K loan. Many people frown upon the idea of financing home repairs for 30 years or even 20 years if they are able to get approved for a shorter term. The good news is that there is a way around it – refinance the 203K!
Many people think that refinancing is not possible a year or so after purchasing a home, but oftentimes it is, especially with the 203K loan. The largest benefit of obtaining this FHA loan is the ability to increase the value of the home within the six month period that the work is being completed. There is nothing better than purchasing a home for $100,000 and having it be worth $200,000 when you are done! For many borrowers, this instant equity means a drastic change in their loan-to-value ratio. This means that they may be eligible to refinance into a conventional loan down the road.
If the loan-to-value ratio and the poor status of the house were the only things keeping you away from conventional financing, the 203K loan gives you the opportunity to grab it. The higher amount of equity you have in the home makes refinancing much easier. Why would you want to refinance? The main reason most people want to do it is to get rid of the mortgage insurance that is paid upfront and on a monthly basis. While you won’t get any of the insurance back that you paid, you can eliminate it from your payments moving forward. You can then use that extra money to pay the loan down faster, which helps to eliminate the number of years that you end up paying for the renovations on your home.
The good news is that you are not stuck with the loan that you obtain to do the repairs on your home. It is like a win-win situation for you. To begin, you are able to purchase the home you want despite its structural or hazardous issues. Once you own the home and make the repairs necessary, you can then refinance out of that loan and into the traditional conventional financing you want because the home should pass a standard appraisal once the renovations are complete. Of course, you will need to have good credit, a low debt-to-income ratio, and stable income in order to qualify for conventional financing. FHA financing, including 203K financing, is much more lenient when it comes to obtaining a loan. The credit guidelines are more flexible as are the requirements for employment history, income, and debt-to-income ratio.
Consider the 203K Loan
If you want to get into a home, consider the 203K loan. It gives you the financing you need while allowing you to work on your credit and/or income in order to be eligible for conventional financing down the road. In the end, you get the home you wanted with the renovations that were necessary or desired and the financing that helps make it all possible. If you end up having to stick with the 203K financing, it is not the end of the world – the insurance is imply the protection for the lender in the event that you were to default. That is a small price to pay for the value that they have provided for you!