Financing Repairs on Your Fixer Upper

If you're hoping to make some major changes to your home, you're likely interested in the types (and terms) of financing available to you. The 203k loan was designed to give homeowners an attractive interest rate, so they'd be more likely to upgrade and modernize their homes. However, it's not available to everyone. Find out more about how the loan works and who qualifies. 

The Gist 

A 203k loan is granted by the FHA, though it's not the same as an FHA loan. You can apply for this loan at the time of purchase or after you've already owned the home for a while. Typically, these loans are granted to people who want to transform properties that have seen better days. So if you're buying a major fixer-upper in an abandoned part of town, you're more likely to qualify. Just as with any lender, you'll want to approach several before finding one for you. 

The Terms 

The interest rate that each homeowner qualifies for will depend on everything from the going rates to the homeowner's credit score. However, it tends to be around 1% more than a conventional home loan. A regular FHA loan has a minimum credit score of 580 but 203k loans typically require at least 640. You'll also need 3.5% of the total cost of the loan in order to qualify. (So if the repairs cost $10,000, you'll need at least $350 to get started.)

How Repairs Work 

These loans are only given to primary homeowners, as opposed to second, vacation or flipped homes, and you're typically not allowed to do the repairs yourself. These loans require you to have serious work completed by an approved contractor, despite the individual zoning laws of your neighborhood. Owners must include an itemized list of upgrades to lenders before being approved. If you aren't able to live on the property during the time of repairs, you can borrow up to six months of mortgage payments to counter the financial burden. 

Types of Loans 

You can either take out a streamline or standard loan. A streamlined loan is typically for those who need to make less than $350,000 in repairs, while a standard has no monetary limits. You can use a standard loan to essentially build an entire property, it only requires a small part of the foundation to exist before qualifying. As you might imagine, standard loans require a more intensive underwriting process. 

The 203k loan can be a great way for homeowners to get the home they want and take a big step toward revitalizing a neighborhood. And while not everyone qualifies, the terms of the loan are typically far more reasonable than conventional lenders.