203,000 Investor Loans: A Special Use Case
The FHA 203k rehab loan can be an affordable way to buy or refinance a home and renovate it with a single loan.
This could make the $ 203,000 loan attractive to investors and fix-and-flippers alike. But there is a catch.
These mortgages are restricted to “primary residences,” which means that the borrower must live in the house all day. So they only work for certain types of investment property.
However, there are ways to legally and ethically use a $ 203,000 loan for rentals and investments. Here is how.
Check your credit score of 203,000 (February 23, 2021).
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FHA 203k loan for investment property
There is only one legitimate way to use a $ 203,000 loan on an investment property. You can buy and renovate an apartment building (2-4 units), or build or convert and live in one of the units.
FHA allows borrowers to purchase 2, 3, and 4 unit homes and renovate them with the 203,000 loan.
To meet the FHA residence requirement, you must have one of the units as your primary residence for at least 12 months.
You can rent out the other units and even use the rental income to cover your monthly mortgage payments.
Advantages of FHA 203k Loan for Investors
This may not be your first investment property idea, but it can be a foot in the door for first time investors looking to test owning and renting out property.
It's also worth noting that since you buy the property as your primary residence, you get access to lower interest rates.
This means you'll have lower monthly payments and overall less interest than someone with a “real” investment mortgage.
The main disadvantage of this strategy is that you have to occupy one of the units yourself for at least a year.
After 12 months, you can rent out the unit you live in and buy additional properties.
But FHA is not for serial investors. Once you've used an FHA loan, you probably can't get another one. You'll need to secure other funding if you move out and buy again.
Also, keep in mind that for those 12 months you will be living side by side with your future tenants – some may view this as a disadvantage while others don't mind.
Another drawback: FHA loans come with expensive mortgage insurance premiums (MIP) that borrowers are usually tied to until they sell or refinance another loan program.
So there's a lot to consider before you embark on the 203,000 investment route.
However, for the right borrower, this could be a great strategy to finance and renovate their own home and some rental units at the same time.
Check your credit score of 203,000 (February 23, 2021).
Can I use a $ 203,000 loan if I already own the home?
If you've already bought your home, you can use a 203,000 rehab loan to refinance your current mortgage. This opens another back door for investors.
You could potentially use the $ 203,000 loan to refinance your current home, do renovations, and then move after a year and rent the house as an investment property.
FHA allows you to rent a home that you still own with an FHA loan as long as:
You have fulfilled the one-year occupancy requirement. You moved for a legitimate reason, such as: B. because of a job move or a conversion to a larger house for a growing family
This would only work for refinancing a home that you currently live in and plan to continue living for at least a year after the loan is closed.
If you've already moved and kept your previous home as a rental property, you will not be able to take advantage of the 203,000 rehab loan because the house is no longer your primary residence.
How does the lender know if it's my primary residence?
Some people make a living by buying fixer tops and then selling them after rehab – also known as "flipping over".
Some might be tempted to take advantage of the 203k program by lying about their intent to live at home. How can the FHA show in court what you were up to when you filed the application?
The main argument against this strategy is that lying on a mortgage application can be a crime that you could see in federal court.
Even an email to a contractor mentioning that you do not intend to live there or some other clue about your plans could appear in the legal process.
Repeated FHA purchases would not be a viable long-term strategy.
With FHA, borrowers can only take out one active FHA loan at a time, except in rare cases (e.g., when you had to move due to work and buy another home near your new job).
In other words, borrowers cannot move once a year and continue to fund new homes with FHA loans.
If you see yourself as a business owner with a bright future in real estate investing, prepare for success by choosing a legitimate financing option that will keep your options open over the long term.
Review your options for investment property (February 23, 2021).
About the FHA 203k rehab loan
The 203,000 rehabilitation loan is supported by the Federal Housing Administration (FHA), a branch of the US Department of Housing and Urban Development.
This mortgage program lets you buy a rundown house – a fixer-upper – and then renovate it with a single loan that covers the purchase price and repair costs.
If that includes demolishing the existing structure down to the foundations and rebuilding it, that's fine under the 203,000 loan rules too.
203,000 renovation loans are only used for repairs necessary to improve the structure or quality of life of the home. So the money cannot be used to add luxury items like tennis courts or swimming pools.
And there is one more important rule: you cannot do the construction or renovation work yourself. For the 203,000 loan, you must hire a reputable, licensed contractor unless you are one yourself and are a full-time contractor.
Limited vs. Standard 203k Mortgage
There are two variants of the 203k program: the "Limited 203k mortgage" and the "Standard 203k".
The Limited 203k was formerly known as the "Streamline 203k". As the new name suggests, this version is more restrictive in terms of the amount you can spend and the type of work you can do. It's also less complicated, hence the former nickname "Streamline".
The maximum repair budget for a 203,000 Limited loan is around $ 31,000 (officially $ 35,000, but there are mandatory reserve accounts that take this into account). And you can't do any structural renovations to the house.
On the plus side, these loans require a lot less paperwork and hassle.
The $ 203,000 limited loan is usually best for current homeowners looking to undertake cosmetic repairs or renovations. It works a bit like a withdrawal refinance, except for you Got to Spend the cash on the DIY jobs you listed.
In contrast, a $ 203,000 Standard Loan allows for much larger budgets and is better suited for home buyers buying serious fixer tops in need of structural repairs.
FHA loan requirements
The basic requirements for 203,000 loans are similar to other FHA mortgages:
A deposit of 3.5% – Based on your purchase price and your rehab budget combined, subject to independent evaluationAt least 580 credit points – With a deposit of 10% or more it may be possible to drop below 580Debt to income ratio of 43% or less – Usually no more than 43% of your gross monthly income can be consumed by housing costs, existing debt payments and other inevitable monthly obligations such as child support
Although the FHA sets these minimum requirements, borrowing money from a private lender. And they are free to enforce their own standards.
For example, some mortgage lenders require a credit score of 620 or 640 for an FHA loan. If a lender has raised the bar too high for you, look for other, more lenient ones.
Check your FHA 203k loan eligibility (February 23, 2021).
What repairs can you do with a 203,000 loan?
The FHA provides tax dollars to guarantee part of your mortgage. So it's not about writing loans for luxury upgrades.
There are strict rules about what type of home renovation you will do and the amount of money you can borrow.
In fact, the total amount that you can borrow to buy and renovate your home is based on the current FHA loan limits, which vary based on local home prices.
You can use this reference book to find the credit limit that you want to buy from.
Maximum rehabilitation loan budgets
We mentioned earlier that a limited loan of $ 203,000 gives you a cap of around $ 31,000 on your rehab budget.
With a Standard 203k, you'll have as large a rehab budget as you'd like, only limited by your local credit limit minus the purchase price of the house.
Your total loan amount, once completed, can be up to 110% of the future value of the property.
However, a valuer will think about your plans to ensure that the final value of the home – after your projects are completed – is equal to the amount FHA is loaning you.
What can you spend your rehab budget on?
The Limited 203k is primarily intended for freshening up a somewhat tired house. So you can do things like:
Replacing Floors and CarpetsInstalling or Replacing an HVAC SystemBuilding a Kitchen or BathroomFixing Anything UnsafeMake the Home More Energy Efficient
However, you can't use the money on structural work like moving load-bearing walls or adding rooms.
The 203k standard is very different.
You can do all of that and almost everything else, including serious construction. You can even move the house to another location with the FHA approving your plans.
The 203k Loan Process
203,000 limited loans are pretty easy. In fact, they are easier to qualify and set up than most.
But a standard 203k is not like that. It can be your best path to your dream home. But there will be some additional hoops to jump through compared to a traditional mortgage.
Here is the basic procedure for applying and closing an FHA 203k loan.
Find your best lender – You can save thousands by simply shopping between multiple lenders. They are not all the same! Make sure that those you are considering are offering FHA 203k loans and have experience in providing these loans. You want a lender who is familiar with the ins and outs of 203,000 loans to make sure the process goes smoothlyGet pre-approved – The pre-approval shows you your exact budget as well as your future interest rate. And you have the opportunity to solve any problems that arise in your applicationFind the house you want – That's the fun piece. But download the Maximum Mortgage Worksheet PDF from the HUD website as it will help you judge whether your plans are affordableFind a 203k advisort – A 203,000 loan advisor visits the site, inspects the building, and then prepares a document detailing the scope and specifications of the project and a detailed cost breakdown for each repair task. He or she also prepares Lender Packages and Contractor Bid Packages, and Draw Request Forms for tiered paymentsFind a licensed contractor – Some lenders keep approved contractor lists. And your advisor can help you find a reputable one. Make sure candidates have proven records on projects similar to yours and are familiar with FHA 203k jobs. Many contractors delay the approval of 203,000 significantly because they seem unable to complete the paperwork correctlyLet the house and the project be assessed – The lender will set this up for youstart working – Once the valuation is approved, the lender should let you close. And your contractor can then start work using an escrow account
For 203,000 limited loans, the borrower must live in the home while the repair is being carried out. So if it is a new purchase, you must move in within 60 days. This is the norm for FHA loans.
Standard loans of 203,000, on the other hand, may include structural repairs that render the home uninhabitable during construction. In this case, the home buyer does not have to move in immediately.
Rehab loan alternatives for investment property
FHA 203k loans are not the only way to buy and renovate a home on loan. Fannie Mae's HomeStyle Renovation and Freddie Mac's CHOICERenovation products can do almost the same thing.
Because the HomeStyle and CHOICERenovation loans are traditional mortgage loans, there are no private mortgage insurance (PMI) fees if you cut at least 20%. This can save home buyers big bucks on their monthly mortgage payments.
However, like the EUR 203,000 loan, these programs are only available for primary residences.
If you are buying a “real” investment property – meaning you don't live in any of the units yourself – these loans are not an option.
However, investors also have other renovation loans to choose from.
Traditionally, you would buy a home with a mortgage and then borrow it separately – possibly with a home equity line of credit or a home equity loan – to make improvements. Then you could potentially refinance both loans to one later.
Another option is to use a withdrawal refinance on your investment property or primary residence and use the funds paid out for repairs or upgrades.
Of course, for all of these types of loans, you need to build up enough equity to cover the repair costs.
If you use the equity of an existing investment property, you will pay higher interest rates.
The advantage, however, is that there are no rules about how the funds can be spent. So if luxury upgrades are on your agenda, this might be the way to go.
Explore all of your options
FHA 203k loans are only available to a select group of investors: those who buy a property with multiple units and live in one unit themselves.
For real estate investors looking to repair or flip a large portfolio of investment property, an FHA loan is not the answer. But there are also many other financing options.
Before buying or renovating a home, do research on all of the loan options. Selecting the right program and lender can help you achieve your goals and save money on your project.
Check your new rate (February 23, 2021)