If you’re considering purchasing an REO (bank-owned) property, you may have questions about financing. Contrary to what you may have heard, you don’t need an all-cash offer to buy the REO property of your dreams. Here we’ll give you the rundown on FHA 203k loan – a financing option specifically designed for those who what to purchase and renovate a bank owned house.
Basically, a FHA 203k loan allows you to bundle your renovation costs into your mortgage with one loan and one closing. The amount you borrow is a combination of the price of the home and the estimated price of the repairs, including labor and materials.
What you’ll need:
- Down payment of 3.5 percent (the minimum required by the FHA loan program). This is based on the full loan amount. Keep in mind your monthly payments will be higher since you’re including repair costs in the same loan.
- You’ll need to qualify according to the standards of your lender, typically with a credit score of 640 or higher and with a maximum debt-to-income ratio of 43 percent, including the new monthly payment.
- Complete documentation of your income and assets and your credit profile.
There are two types of 203k loans: a streamlined version and a regular version. The streamlined 203k program is meant for homes that don’t need structural repairs and are capped at a maximum of $35,000 in repairs.
Traditional 203k loans, on the other hand, have a minimum requirement of $5,000 and can be used for structural repairs. Both types of loans require the repairs to start within 30 days of the loan closing and to be completed within six months.