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This Loan Can Fix Your Fixer-Upper

SEATTLE (Zillow) -- In most areas of the country, the number of homes for sale needing at least a few repairs before move-in is substantial, because many times in a short sale or foreclosure situation, the seller will allow the home to go into some state of neglect.

To help pay for needed repairs, buyers shopping for a mortgage should look into the FHA 203k loan program.

The FHA 203k is popular with buyers of fixer-upper homes, and for good reason.

The FHA 203k loan program can be grouped into two types of loans: the FHA Streamline 203k loan program and the FHA 203k loan. The FHA 203k streamline is designed to be a limited repair program and has simpler processes and no HUD consultant required, unlike on the full FHA 203k loan. In my experience, the FHA 203k streamline is a more popular option since many of the needed repairs for bank-owned homes can be considered "cosmetic."

Highlights of the FHA 203k streamline loan:

  • It works very similar to a construction loan, allowing you to buy a home that wouldn't qualify for FHA financing due to repair work being needed.
  • The loan amount is equal to the purchase price of the home plus the amount needed for repairs.
  • It allows for repairs ranging from $5,000 to $35,000.

Highlights of the FHA 203k loan:

  • Qualifying for FHA 203k loans are the same as regular FHA loans.
  • Repair work cannot begin until the loan closes, and the money to pay contractors comes from an escrow account set up when the loan closed.
  • FHA 203k loans require UFMIP and MIP, just like regular FHA loans.
  • Appraisal are required.
  • They're available for owner-occupied properties only, although rumors are surfacing of an "Investor 203k loan" coming soon.

The FHA 203k programs can be used to finance needed as well as wanted improvements and can go up to 10% over the appraised value of the home. Here is a simple example that illustrates how the financing package works:

  • As-is cost of a home: $150,000
  • Improvement costs: $20,000
  • Total cost of home after improvements: $170,000
  • Required appraised value: $154,545

Simply put: With the 203k loan, it is possible to buy a house in need of repairs for $150,000, finance $20,000 worth of repairs and have the home appraise after the improvements for $154,545.

No wonder this loan is so popular option for financing a foreclosure, bank-owned property or a short sale.

Justin McHood works for Academy Mortgage and is based in Chandler, AZ. He is a contributor to Zillow Blog and has conversations about mortgages whenever he can. Learn more about Justin at http://www.mortgagecommentator.com.

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