upper limit in high-cost counties is $765,600,” DeGrave says. “Also, closing costs are often higher, and the loan may take longer to close than a standard purchase or refinance.” What’s more, you’ll have to pay an upfront mortgage insurance premium (1.75% of the loan amount) as well as monthly mortgage insurance premiums, which provides a level of protection for the lender in case you default on your loan. “Unlike private mortgage insurance, which typically may be canceled once the loan-tovalue ratio on the loan falls below 80 percent, the monthly insurance premiums on FHA loans with loan-to-value ratios over 90 percent are for the life of the loan and cannot be canceled. For FHA loans with loanto-value ratios equal to or less than 90 percent, portion of the rehab the monthly mortgage – the lender handles insurance drops off after this directly with your 11 years,” says DeGrave. remodeler.” “In addition, it can be Best of all, you only hard to find a qualified have to make a single contractor because they loan payment. have to be certified by “Also, with an FHA the FHA and willing to 203(k) loan, there’s only work with the difficult one closing and one funding release process. set of closing costs,” And FHA loans are not notes Dennis DeGrave, as attractive to sellers as branch manager at conventional loans, so it Inlanta Mortgage in may be difficult to get a Pewaukee, Wisconsin. house under contract,” However, there are a few cautions Morgan. caveats. To qualify, you need at “A purchase price limit least a 580 credit score applies. Currently, the (many lenders may maximum amount require 620 or higher), for an FHA loan on a a 3.5% down payment, single-family home in and a debt-to-income a low-cost county is ratio of 43% or less $331,760, while the (including your new
Is a fixer-upper in your future? An FHA 203(k) loan can help By Erik J. Martin CTW Features ou’ve got your eye on a diamond-inthe-rough residence that needs some TLC. You can likely fetch it for a reasonable price, but you’re not looking forward to closing on the mortgage loan and then having to finance the fix-its separately. Things would be a lot simpler if you could roll the remodeling costs into your loan. Fortunately, there’s a product offered just for this purpose. It’s called an FHA 203(k) loan, and it may be easier
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to qualify for and save money with this financing option than you think. “The FHA 203(k) combines the cost of the renovation plus the purchase price into a single loan,” explains Erik Wright, owner of New Horizon Home Buyers in Chattanooga, Tennessee. “This loan allows an opportunity to renovate a home and potentially end up with significant equity after completion.” Shaun Morgan, a personal finance blogger at SimplyKnowMoney.com in Lubbock, Texas, says this loan offers several advantages. “First, it’s backed by the
government – specifically the Department of Housing and Urban Development. And like a regular FHA loan, it requires only a 3.5% down payment on the total cost of the loan,” says Morgan. “The way it works is that a lender or bank releases the funds to purchase your property. Then, a qualified and licensed contractor comes in to complete the specific repairs on your home. Whenever the contractor completes a portion of the repair, they can request to get paid from the lending institution. In other words, you don’t handle the money
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mortgage loan plus all other debts); also, you must plan on living in the property yourself as your primary residence, and you must be a US citizen or permanent resident, according to Wright. “An ideal candidate is someone who wants to get a deal on a house that is overlooked because it is run down and is willing to wait as the house gets remodeled. The candidate probably doesn’t have a lot of money saved up, either. Ideally, this person is a first-time homebuyer, and they must not have another FHA-backed loan,” Morgan says. Amy Cherry Taylor, a Realtor in Fredericksburg, Virginia, says these types of loans can also benefit buyers who continue to lose out in multiple offer situations. “I have had several clients use an FHA 203(k) loan and then reap the benefit of owning a renovated, on-trend property when the time comes to sell,” she says. If you don’t qualify or want to explore alternatives, you can always purchase the home via a standard mortgage loan and then finance the rehab by applying for a home equity loan or home equity line of credit if you are eligible. “Alternatively, you can pursue a construction loan. But that will typically require at least a 20% down payment and may come with a higher interest rate,” says Morgan. 5
