What is a 203k loan and how do you buy a property that needs fixing up? In this interview, find out all about 203k loans and buying a house that needs work!
Brian Spitz Hello, I’m Brian Spitz, President of Big State Home Buyers. We’re Houston’s top firm to go to if you want to sell your house quickly. You can visit us at bigstatehomebuyers.com. Today we want to talk a little bit about what a borrower can do to buy property that needs to be fixed up. There is a specific kind of loan that not a lot of people know about that is in the realm of conventional lending, and it’s called a 203k loan. Is that correct?
What is a 203k Loan
James Beaver That’s correct. It’s catchy.
It’s catchy. Yes, it’s very catchy. So 203k loans, something that I’ve invited James Beaver from Envoy Mortgage to tell us more about. Thank you for your time today.
James Beaver Absolutely. Thanks for having me, Brian. I appreciate it.
Brian Spitz So tell us, what is a 203k loan?
James Beaver A 203k loan is a type of FHA loan product that’s out there that enables a home buyer to buy a home that’s maybe in need of some TLC. It’s not the way they want it, not the way it should be.
Two Ways to Approach the 203k Loan
There’s really two different ways to approach the 203k loan. The first is called a streamline, and then there’s a standard. A streamline 203k loan really has to do with kind of cosmetic repairs, fixing things up. The maximum amount that can be earmarked for those cosmetic repairs is thirty-five thousand dollars. And you need to keep the total—the purchase price plus the repairs plus any miscellaneous fees related to the 203k, permits and things like that, cannot exceed the maximum allowed FHA loan limit, which for our area right now here is $295,550. You take that number minus thirty-five thousand dollars—that’s the maximum for the repairs—and then you’re kind of left with the maximum purchase price.
Advantages of 203k Loan
Brian Spitz 0:02:32.9 Okay. So what is the difference between doing that and just buying a house with a conventional loan and I go and put the repairs in? This allows me to borrow that repair money, or does it allow you to buy properties that are in worse condition than you would typically be able to borrow for?
James Beaver Well, both, really. Yeah, so one of the advantages of the 203k loan is that the loan is based—you can close on the loan with the property as is, meaning the stuff that definitely needs to be fixed up that for a conventional loan would probably need to be prepared before you can close, before it could be considered livable.
Brian Spitz And that’s the standard, isn’t it—habitable?
James Beaver Yes, exactly. So you’re able to close as is with the 203k. The streamline has the thirty-five thousand. And by the way, the standard allows for more than thirty-five thousand. You’re just still capped at a total amount that cannot exceed that $295,550.
Brian Spitz Okay. A lot of people come to companies like ours because the house is in need of repair that even if they put it on the open market a traditional buyer couldn’t get a loan on it. The foundation is too bad. The roof is gone. There’s things that they may not want to invest the money to fix or can’t afford to fix, and so they’re kind of in a situation where they need a cash buyer. So are those issues that a conventional borrower could take out this loan and fix after closing, or is there a minimum, I guess I should say? The foundation has to be good, or the roof has to be good.
James Beaver Yeah, that’s a great question. The 203k will allow someone to go in and purchase a home that has issues. The standard 203k allows for more structural that requires engineers and so forth and so on. So adding on or fixing major problems is what you’d want to use it for. You’d want to use the 203k standard version for that kind of situation.
Brian Spitz Not very common? Are these kinds of loans common?
James Beaver Not a ton of people use this product. It’s definitely a niche product, but it really serves a purpose, and it opens up a lot of new opportunities for houses that just need the right situation to be purchased.
Brian Spitz And buyers that are willing to fix up these properties.
James Beaver Yeah, absolutely.