The FHA 203K loan is a type of loan used to refurbish or refinance a home. Further, FHA 203K loans are earmarked for those living “primary residences,” so they are specifically useful for families who want to rehabilitate their current home. These loans allow regular people and investors to fix up their homes using a single, affordable loan.
The Basics of the FHA 203K Loan
The FHA 203K loan is a mortgage that the Federal Housing Administration backs. It offers low-interest-bearing loans, but it does require borrowers to obtain mortgage insurance. The loan can be used to renovate the borrower’s current home or buy a tear-down and construct a new home.
These loans must be used for primary residences. People who are fixing up their condo unit, single-family home, or other residences may qualify. These loans can also be used to refurbish two to four-unit properties, such as small apartment buildings or townhomes. The borrower must live in one of the units for at least one year during construction or rehabilitation. Thereafter, the borrower may lease the unit to a tenant.
Limits on Using an FHA 203K Loan
A major limiting factor for many borrowers is that they must live in the residence while it is under construction or getting refurbished. This requirement imposes two issues for some homebuyers. First, living in the unit while it is under construction may not be a comfortable living situation. Second, borrowers who are refurbishing a multi-unit property must live in the building with their tenants. This isn’t an issue for some borrowers, but if one or more tenants is finicky, it could be another headache.
FHA 203K loans are not as attractive for investors or professional home flippers because they are typically only issued once. However, for a regular family, these loans are useful for major upgrades or fixer-uppers. Finally, these loans also require expensive mortgage insurance premiums, which remain on the property until it is refinanced out of the 203K program or paid off.
Using the Home on an Existing Residence
Good use of the 203K loan is to refurbish an existing one. The borrower could use the loan to finance a major rehabilitation of her current home and (a) live in the newly remodeled home, or (b) rent it to another family after one year passes.