Most mortgage lenders only provide loans once the value of a property is firmly established. This allows them to know the exact value of the collateral they accept in exchange for a mortgage. When a house is in need of repair, a homebuyer will need to get transition financing before a long term mortgage. The Federal Housing Administration (FHA) offers the 203k mortgage loan program to solve this problem.
The goal of a simplified 203k mortgage loan is to provide the three required financing portions for a fixer-up in one step: initial financing, funds for repairs and a long-term mortgage. The borrower only has to guarantee a loan to do all three instead of three separate loans. This can save a considerable degree of hassle and eliminate the possibility of a borrower having trouble getting a long term mortgage loan once the rehabilitation is complete.
The loan of the FHA 203k is a loan guarantee. This means that the loan comes from a private lender, usually one who is FHA qualified. Then, the FHA guarantees the loan, which means that it is insured against default. If the borrower cannot continue the payments, the FHA will buy the loan on delinquency. The lender has a very low degree of risk in this scenario.
The FHA does run low-income or low-paying borrowers. However, the FHA has very high credit standards. If you have outstanding tax payments, defaulted on a previous installment loan or default on a government loan, you will not qualify. In general, even if your credit history is short, you will be required to have no substantial negative activity on your report in order to qualify for the 203k loan option. The property you buy must also be eligible.
If you fail to get the 203k mortgage loan, you will be able to move through the rehab process with greater ease than private, separate loans. You will know the terms of your long term mortgage ahead rather than waiting after the rehab is completed to find out the total cost of your financing.
With the 203k mortgage loan option, you will see some disadvantages. The biggest risk is the limitations you may have on the improvements and changes you can make. Several inspections may take place while the property is being improved to ensure the final product will meet FHA standards. Finally, these loans may take longer to finance because the government agency is involved and has more regulation on existing property, adjustment plans and the final product.
Who is eligible for an FHA loan?
The Federal Housing Administration provides private loans to extend the ownership to more Americans. Although the income and down payment requirements for FHA loans are low, a borrower still needs to qualify based on credit and financial requirements.
There are five main types of loans: FHA first real estate loans, fixer loans, help for the elderly, energy efficiency loans and manufactured real estate loans. There are a variety of other programs, however, such as the Next Good Neighbor Door Sale Program for Teachers, Fire Fighters and Public Service Agents. Look in the programs on the HUD website for more information.
The purpose of FHA loans is to help homebuyers who are good candidates for mortgages to overcome small challenges. For example, a first-time homebuyer can have a high income and a good credit, but miss a down payment, and the FHA can help with his low down payment program. The purpose of the program is not to help those who are not qualified for home ownership; it is designed to make the property more accessible for responsible borrowers.
The FHA defines a responsible borrower as someone who:
- A history of stable employment
- Has a stable income, preferably increasing in the last 24 months
- Is free of any bankruptcy filing, Chapter 7 or 13, in the last two years
- Has not been foreclosed for three years
Has a globally high balance sheet of loan repayments, including a lack of tranche defaults and revolving debt.