FHA 203K Mortgages allow you to buy houses that need repairs

When shopping for a house you will sometimes see a home described with the following phrases “Needs TLC” or “Handy Man’s Special” or “Lots of Potential.”   Buyers often avoid these properties because they are cautioned that obtaining a mortgage for a property that needs a lot of repair or renovation will be difficult and maybe impossible.  It is true that many traditional mortgage programs do not allow for properties that require a lot of repair or they will require that the seller make any needed repairs prior to closing.  Sellers may agree to make some very minor repairs but it is unlikely that they will tackle extensive repairs or renovations.  It is also common that homes needing a lot of repair are bank owned foreclosures.  Foreclosures are generally sold “As Is” which means “take it of leave it.”  

There is a solution to buying a house that needs repair. The FHA 203K Mortgage program allows buyers to include any needed repairs into the new mortgage amount with the same 3.5% down payment.  For example, if you find a home with a sales price of 150K that needs 20K worth of repair, this 20K of repair cost would be included in the new loan amount. 

This is possible due to how the home is appraised.  The FHA 203K appraiser will determine two different values for the home.  The “As Is” value is the value of the home before any repairs or improvements.  The “After Improved” value is the proposed value of the home after all scheduled improvements and repairs have been completed.  A buyer using the FHA 203K program will be able to actually borrow more than the sales price because the FHA will base the loan amount on the “After Improved” value.  The benefit to this method is that the buyer can obtain the needed renovation funds without having to increase their amount due at closing beyond the FHA’s standard down payment of 3.5%.  Essentially, a buyer using the FHA 203K program is financing their repair costs. 

Before you pass by the next house that needs some work, you may want to consider if the FHA 203K program is good fit.  This program often allows you to purchase a property that may have a lot of potential and may be undervalued.  

Some common FHA 203K repairs include but are not limited to… 

  • Replace and repair of roofs, gutters and downspouts..

  • Replace and repair of flooring.

  • Kitchen renovations

  • Bathroom renovations

  • Interior and exterior painting.

  • Improved insulation including weather stripping, storm doors, storm windows, etc.

  • Repair/replacement/upgrade of existing heating systems

  • Repair/replacement/upgrade of air conditioning systems

  • Purchase and installation of new appliances (stoves, microwaves, dishwashers, washers/dryers)

  • Improvements to facilitate accessibility for persons with disabilities.

  • Lead-based paint stabilization or abatement of lead-based paint hazards

  • Repair/replacement/addition of exterior decks, patios, porches

  • Repair/replacement of electrical systems

  • Repair/replacement of plumbing systems

  • Replacement of windows

  • Replacement of doors

  • Exterior siding