FHA 203k Mortgage – A Loan to Buy and Fix Up a Distressed Home
Ever hear of a rehabbing loan for ordinary buyers?
Many possible buyers do not realize that they may get a lot more home for their money by buying a distressed character with a 203K loan.
The FHA 203K loan simply bundles the cost of rehabbing a distressed character into the total mortgage of the home.
The value of using a FHA 203k loan, explained in simple terms is as follow:
When someone buys a home that is in a move-in ready condition, they will most likely pay the fair market value for this home. If they apply for a FHA loan their down payment will be 2,5%. Any alterations that they wish to do to make the house their “own”, such as changing the kitchen or bathrooms will be additional costs after the sale and this cost will be carried by the buyer.
For example one person buys a move in ready home at it’s fair market value of $400,000.
A similar home in the same neighborhood is also for sale but this home is distressed, and in need of updating and repair. For this reason the buyer will pay a lot less for this character, and with a FHA203K loan the buyer will be able to fix-up and repair the house to bring it the same standard as the 1st home. Generally this in total can be done for much less than the cost of the 1st home so the new buyer of the distressed home will have immediate equity in the character. This is also referred to as “sweat equity”.
To explain this, let us say you paid 80% of after repair value (80% of $400,000), consequently $320,000 and the character needs $35,000 in rehabbing and repairs. The FHA 203K loan will allow a loan amount of $355,000 covering both the buy price in addition as the rehabbing or repairs to bring the house to the same standard as the 1st house e.g a house with a fair market value of $400,000. The additional advantage is that you can select your kitchen or other upgrades and tailor it to your liking during the rehab/repair. You now have $45,000 equity in the house.
The FHA 203K loan is ideal to finance the buy and the repairs/rehab with one loan, plus with all the advantages of an original FHA loan.
The above explanation is a very simplified form of this course of action and there are strict guidelines you will be required to follow when rehabbing with a FHA203K loan. Make sure to discuss all these requirements beforehand with your lender.
For assistance with getting a list of distressed homes in SW Florida feel free to visit https://greaterswfl.com/fixer-upper-homes