FHA 203k Loan Vs. Conventional Mortgages

When shopping for a new loan to finance your property, there is a big difference between the qualifying guidelines, interest rates, down payment requirements and benefits when comparing an FHA 203k loan and a Conventional Mortgage.

Most conventional loans provide permanent financing on move-in ready homes with a current value that can be easily calculated and established.

A lender's loan guidelines dictate that they can not close a loan and release proceeds unless the condition and marketability of the property provides adequate security for the mortgage.

This means the home must meet pre-determined appraisal standards. If rehabilitation is required, the majority of lenders require the improvements to be complete before they will offer a long-term mortgage.

Therefore, if a potential homebuyer is interested in purchasing a house in need of upgrades or repair, they will typically need to first secure financing to buy the home, have adequate savings or obtain another loan to cover the rehabilitation work, then refinance into a permanent mortgage when the work is complete.

The acquisition and construction loans not only have costs associated with each, but often involve relatively high interest rates and short repayment periods.

The FHA 203k program was created as an affordable alternative to this situation. Using a 203k, the borrower must only qualify for and obtain a single mortgage loan to finance the borrower's purchase and renovation.

The total mortgage amount is based on the projected value of the property after completion of the work. The difference between the current value and the projected value helps establish the amount of additional funds which will be made available to the borrower to finance improvements.

An FHA 203k loan is just like a regular FHA loan as far as credit qualifying and down payment requirements, but with an added contraction element.

Qualified owner-occupants can utilize the program to modernize, renovate, upgrade, rehabilitate or improve an existing 1-4 unit dwelling in one of three ways:

• Purchase an existing dwelling and the land on which it is located
• Refinance an existing mortgage on an owner-occupied property
• Purchase a dwelling and move it onto a new foundation on the mortgaged property

Compared to a conventional mortgage, the FHA 203k loan saves a borrower a significant amount of money in both down payment requirements, as well as out-of-pocket costs needed for any renovation work.

Page Tags: 203k vs Conventional | FHA vs Conventional | FHA Loan vs Fannie Mae