Buying a property in need of renovation can be a great way to build equity and get a fantastic deal in real estate. If you don't have the funds to renovate the property, coming up with them on the fly can be a challenge. In this situation, the FHA 203k loan might be the tool that you've been searching for.

What is an FHA 203k Loan?

The basic idea behind an FHA 203k loan is that it makes it possible to borrow the money that you need to buy a property and to rehab it with a single loan. You've got one closing for the project and everything is lumped together. This is often the ideal solution for entrepreneurs that are looking for a way to get the money they need to remodel a house and acquire it at the same time. 

Qualifying for the FHA 203k Loan

While the FHA 203k loan can be a powerful tool for the right person, not everyone will qualify. Basic credit and income requirements will apply for this type of loan. Most banks will require that you have at least a 640 FICO score. Since the loan is backed by the FHA, banks can be a little more lenient with their underwriting standards, but they are still on the hook for the majority of the funds. In addition to meeting underwriting requirements, you'll also have to put up some cash for a down payment. You'll need at least 3.5 percent of the purchase price of the property to get an FHA 203k loan. The value of the home also cannot exceed the maximum FHA lending limit in your area. 

Types of 203k Loans

The FHA 203k program presents you with two different options to pick from, depending on the type of house that you hope to buy and rehab. The streamlined version of the program is perfect for homes that don't need any structural repairs. The maximum amount for repairs on this type of home is $35,000. This is a perfect option if you just need to do cosmetic repairs to the property.

The standard 203k loan is for more intensive repairs. They require you to make at least $5000 of repairs and they allow you to borrow more money for repairs overall.

Considerations

While the FHA 203k loan can be a powerful tool in the right situation, it's not for everyone. One of the downsides of this type of loan is that it takes longer to close. When using an FHA loan, there are more requirements and hoops to jump through. You'll have more paperwork to complete and it takes the bank longer to process. If you're involved in a deal that needs to be closed quickly, the FHA 203k loan may not be ideal.

In addition to the extra time it takes to complete, you'll also have to pay a 1.5% fee for using this loan. Despite the extra time and fees, it is often the only option that makes sense for those hoping to buy a property that needs some work.