What is a 203K Loan or Mortgage?

A 203K Mortgage is a more complicated loan product, designed to help homeowners purchase property that needs immediate work in order for the home to be ready to live in. It is an FHA loan, which means that is government backed, which is a way of saying that the risk on the loan is held by Uncle Sam. Generally, it comes in two parts, and these programs can have differences over time, but typically, you get a "regular" mortgage for the original purchase, and a "home equity" for the work that needs to be done. After the work is done, the loan "converts" to a "regular" mortgage. These loans can often be used with little money down - sometimes less than 4%.


When does a 203K make sense?

A 203K loan makes sense when a perfectly good property has one or two major issues that are keeping it from being sold, to the point where the price of the home is far below market value. Here's an example. Let's say a home needs a new roof. Now NOBODY wants to buy a home that needs a new roof. Let's say further that similar homes, that don't need new roofs, are selling for 350K. This home is on the market for $325K, and a new roof is estimated at 10K. Well, that means you could spend 10K, and then have a home worth 350K, meaning you "made" 15K in equity. That's nice.




Now, it's equity, so you can't access it right away, but it's nice to get paid for renovations, and that's what the 203K is about. Could you use a 203K in a situation where you don't make any money? The answer is yes, but WHY would anyone do that? By agreeing to do the work, you're taking on risk that the estimate will be low - and you still need to pay for a new roof - so to use a 203K to fix a home and not build any equity is not a situation that I think makes sense. Can you use a 203K to LOSE equity. Let's take a situation where you purchase the home at $340, thinking you've got 10K to spend on a new roof, but when you redo the roof, the underlayment needs to be replaced. Oops. Now you'll spend 15K, and you'll be in for $355K when it's only worth $350. You could have a scenario happen like this. Now the bank is going to use appraisers to help you out - they will try to limit your exposure to 110% of the expected value - but it could happen. So for a buyer to have, in my opinion, a successful 203K loan situation, you need: A) A good understanding of what the home will be worth when the work is done B) Reliable estimates as to the works cost, and what can go wrong C) A home that will pay you back for the effort and equity you build.

Do I qualify for a 203K Mortgage Program?

The programs are designed for owners, not investors. That means you can only use a 203K on one home at a time - you can't own two homes under this program. But as long as you intend to own the home, most of the guidelines for a 203K are similar to traditional financing. You'll need the credit, work history, and income to qualify for the money, and the home must be worth (within 110%) of it's projected future value. There's a lot there, but basically if you qualify for a traditional loan, you can probably qualify for a 203K. The home needs to meet certain guidelines as well, but most of these can be addressed as part of the process.

Are there risks to 203K Mortgage Programs?

Doing work on a home is rarely simple. Navigating through contractors, ideas, plans, architects, and the desires to do "perfect" rooms can sabotage any home improvement project from being effective equity builders. There is definitely the risk that you go significantly over budget and run out of funds. But if you think you can handle the responsibility, and desire an opportunity to make a home with your signature stamp, this can be the way to go.

What types of repairs can be covered?

Lots of types of repairs and updates can be done with 203K funds. An incomplete list: Painting, Decks and Patios, Bath and Kitchen remodeling, Structural repairs, New siding, additions, lead paint mitigation, heat and A/C repairs, plumbing, roofing, flooring, and increasing disabled access.




More Information on 203Ks

  1. Very Detailed Information from Forbes



Do Good Things Today! Matt Heisler