When you are looking into buying your dream home, one way to have your perfect custom home is to renovate an almost perfect house. Those who do not have the means to pay cash for those renovations can look to a 203k loan as an alternative.
203k Basics
A 203k loan allows you to use one loan for both the purchase of the property as well as the improvements. Lenders find these loans attractive because they are guaranteed by the FHA and therefore decrease the risk taken on by the lender. It also allows you to refinance your home and make the upgrades you want while having it all rolled into one loan.
You are borrowing money based on the future value of your home. You are basically amortizing the cost of the repairs into your investment. This is an important detail when choosing to work with a Contractor. You will want to consider the ARV (after renovation value) when making design choices.
Streamline vs. Full 203k
In the simplest of terms, a full 203k deals with major construction including structural remediation. Streamline covers smaller projects and are generally simple repairs and cosmetic updates. The loan you apply for will be determined by the scope of your work. Your loan officer will help you with this.
Contractors
Renovation Lending Departments often do the due diligence for you. These contractors have been screened for you and you can feel confident that the bids you have received are appropriate for your project. Contractors have to actually put out their own money and are reimbursed according to the amount of work accomplished and inspected by the bank. Not all contractors are able to financially handle this type of work.
Challenges
While we know that this loan can be the gateway to living your best life, many times it is not recommended by your real estate agent. Why? They make their money on the commission of the sales price of your house. It is in their own personal interest to have you purchase that $400k home rather than a $200k home that needs $200k of work.