First-Timer Primer: What is a 203K Loan?

• October 2nd 2023

by UrbanTurf Staff

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In this edition of First-Timer Primer, we look at the ins and outs of the 203k loan.

Basically, the 203k is a loan product that offers borrowers a mortgage to cover both the purchase of a home and necessary renovations. The borrower will receive funds to undergo a renovation, which will be rolled into their single monthly mortgage payment for the duration of the loan. The mortgage amount is based on the projected value of the property once the work is complete.

Luxury improvements are generally not covered; the 203k usually provides funds for a more basic renovation.

Below are some of the most frequently asked questions that potential borrowers may have about the loan.

What is a 203(k) loan?

A 203K is a loan that provides funds for both the acquisition of and renovation to a property. The renovations can include required items or desired upgrades such as new bathrooms or kitchens.

Who are the best candidates for this loan?

Any buyer that is going to own and occupy the property is a candidate. The property can be a one- to four-unit single-family property, and also a mixed-used property. For instance, the property could have a restaurant or office on the first floor and residential above. [According to HUD, the rehab funds must be used on the residential portion.] The best candidates are those that are value conscious, interested in a property that may need work, and/or those that understand the cost-benefit of energy efficiency upgrades.

What is the range of renovations that the loan may cover?

The range is as little as small cosmetic repairs, like painting and new flooring, to knocking down a house to the foundation and building a new one. The minimum rehab amount is $5,000. 

Is it difficult to qualify? Does it increase your interest rate?

Like other FHA loans, they are more flexible than conventional loans. The interest rates run 0.25 – 0.50 percent higher, depending upon the day the rate is locked in.

What is the process? When do you choose a contractor, and how much detail do you need to know about your renovation?

The process mirrors one for a regular loan except for the addition of a rehab estimate to determine the rehab portion of the loan and the after-renovated value. You choose a contractor as soon as you can.

The desired time of completion is six months. However, it is understood that many go longer.

What are the drawbacks?

The drawbacks are having to deal with contractors and, if major work is necessary, the permitting process. It also takes about 15 days longer to close.

This article originally published at http://dc.urbanturf.production.logicbrush.com/articles/blog/first-timer_primer_what_is_a_203k_loan/7696.