Some FHA loan applicants are interested in what the FHA calls “Handyman Specials” or “Fixer-Upper Loans” known as the FHA 203(K) mortgage. The FHA 203(K) is a loan guaranteed by the FHA, issued through a private lender for the purpose of buying and repairing property at the same time. There is a down payment requirement, which according to the FHA is “approximately 3.5%” of the purchase and repair costs.
FHA 203(K) mortgages are available for those who intend to buy and occupy the property, but non-profit agencies and government entities can also apply. According to the FHA official site, there are a series of steps the borrower takes to apply for a 203(K) loan.
First, the buyer finds a suitable property to purchase and repair. According to the FHA, both a sales contract and a “feasibility analysis of the property” are required. “The contract should state that the buyer is seeking a 203(k) loan and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender.”
When the buyer approaches the lender, there must be a detailed proposal that shows the repair work, “including a detailed cost estimate on each repair or improvement of the project.”
For 203(K) loans, appraisals are required, but in these cases the appraisal isn’t just to determine the current value of the property but also to assign a fair market value to the home after renovations/repairs are complete. As with all other FHA home loans, there are the usual credit checks and income verification requirements.
According to the FHA, “If the borrower passes the lender’s credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the allowable closing costs. The amount of the loan will also include a contingency reserve of 10% to 20% of the total remodeling costs and is used to cover any extra work not included in the original proposal.”
When the loan closes, the seller is paid, and all remaining loan money is placed into escrow and is released to pay for the labor and other costs of renovating the property.
For an FHA 203(K) loan, payments are due after the loan closes, but the FHA borrower does have an option to include up to six mortgage payments into the cost of repairing the property. The FHA places limitations on this option, stating “it cannot exceed the length of time it is estimated to complete the rehab.”