A 203k loan isn’t any more difficult to qualify for a regular FHA loan or conventional loan. You have to give the same income, asset and liability documentation and as long as you have at least a 3.5% down payment you can be considered for a 203k loan. You don’t have to have any reserves (reserve money in an institution that can be used to make emergency mortgage payments) either. Being that the 203k loan allows you to buy a home and receive repair/remodeling funds-all in one loan, with a low 30 year fixed rate, you would think that the qualifying for this unique loan is much more difficult than a regular FHA or conventional loan, this is not true at all.
So what’s different about qualifying for a 203k loan? Usually your Realtor will ask you for a prequalification letter from a lender that shows that you are qualified to buy a home for say $250,000. With a 203k loan your final loan amount can not be determined until after the appraisal of the property you are looking to buy is done, which means your Loan Originator can not give you an exact prequalified loan amount upfront. This is different from the regular FHA 203b loan and Fannie Mae and Freddie Mac conventional loans. This is what confuses Realtors, sellers and home buyers which in turn scares them away from the 203k loan, but once you understand the process, and you, your Realtor and your Loan Originator do your homework upfront before you make an offer, there is nothing to be afraid of.
The 203k loan appraisal is different as well, where a value of the home is estimated, has two values: An as-is value and an after improved value. The after improved value takes into account the improvements that are to be done to the home before the repairs are actually done. So depending on what repairs are done to the property will have a direct outcome on the after improved value, which affects your final loan amount.
Once the appraisal is finished and delivered to the lender, which is a few weeks into the process after your offer has been accepted, than your Loan Originator will work the numbers for you.
Your down payment amount is figured off of the after improved value of the home as well, not the as-is value, but again if coached upfront correctly this isn’t a deal breaker. If you buy a home with an as-is value of $300,000 and the after improved value is $325,000, your minimum 3.5% down payment goes from $10,500 to $11,375. It’s best to pad numbers a bit when estimating loan amounts, down payments and repairs, so there’s no surprises later.
Having a knowledgeable group of people who know the 203k loan and its nuances is critical. The Realtor, Loan Originator and contractor should know the 203k loan process. You the borrower should also do some research on the 203k loan before applying for a loan. I have a free 203k loan video on my website, as well as a free 203k Streamline guide. Take a few minutes and familiarize yourself with the basics. The 203k loan is a worthwhile endeavor and it’s popularity is growing.
In qualifying for the 203k loan, it takes the same amount of paperwork and time, there’s no smoke and mirrors. If you get any push back from your Realtor or Loan Originator on the 203k loan, it probably means they don’t understand it or didn’t get involved with the right team of people who could get the loan done. Don’t fret, keep your vision and shop around for a team of people who understand the loan and are receptive to it.
For more information on learning on what needs to be done upfront on the 203k loan to ensure a successful transaction, feel free to contact me or click here.