Bob Kutscbach, owner and broker od Carleton Realty talks about the good and bad parts of a 203k rehabilitation loan. This loan is an FHA insured loan that can be great for some buyers and properties but bad for others. A 203k loan has a low downpayment of 3.5% and that downpayment can be a gift from a family member or a nonprofit organization.
A 203k rehabilitation allows you to purchase a home and do the repairs necessary to bring the home up to FHA standards. FHA has very high standards when it comes to condition. This is good and bad. This means that the 203k is an excellent opportunity to address cosmetic issues in a home, such as windows, siding, paint, and flooring. These types of repairs add to the market value of a home. But the problem arises when everything is required to be brought up to FHA standards. If the home needs mechanical repairs, like rewiring, replumbed, new furnace and air conditioner, you must be careful since these types of repairs are very costly and do not add as much to the market value of the home.
Another issue with a 203k loan is that there are a lot of fees and inspections required. The buyer generally has to pay for 2 appraisals, one at the beginning as the home sits, and one as if the home were fully improved. Sometimes the buyer will have to have the roof and mechanicals certified by a professional. These fees add up!
You must be careful to make sure that since the 203k loan allows you to finance 110% of the improved value of the home that you do not end up owing more than your home is worth at the end. This can be a great loan if you make sure that you are not over-improving the home and that the home will be worth more than your loan amount.
The best way to protect yourself is to work with a REALTOR® who understands the loan thoroughly. They can write an offer to protect you by being contingent on the home being worth more improved than the cost of the repairs. A good agent can write a limit on the repair cost into the contract, so if the FHA requires more repairs than what the home would be worth improved the buyer can terminate the contract.
If you want to explore a 203k rehabilitation loan give us a call! Our expert REALTORS® can help you with your real estate journey.