Like any loan, there are advantages and disadvantages of the FHA 203K loan. Understanding both sides can help you determine if it’s a good investment for you.
Pros:
• You can buy a rundown house without having to pay cash for the entire purchase.
The home’s current value doesn’t matter as much as the after-repaired value does with the 203K program.
• You don’t need a large down payment.
You can put down just 3.5% on the home and have funds to buy and renovate the property. You can even use gift funds to secure the loan.
• It has flexible underwriting requirements.
FHA loans are known for their flexible underwriting requirements. You don’t need perfect credit or a low debt-to-income ratio to qualify.
• You’ll earn equity in the home fast.
Since you’re renovating the home, you’ll likely improve its value which can mean you earn instant equity in the home.
• FHA loans have competitive interest rates.
You don’t have to worry about paying high-interest rates for your home renovations. You get the same interest rate you’d get for the purchase loan, saving you money on the renovation costs.
Cons:
• You must live in the property as your primary residence.
The FHA 203K program is only for owner-occupied properties. You can’t use it to buy and fix up a home and then rent it out or sell it. You must certify that you’ll live in the home.
• It can get complicated.
There are a lot of moving pieces to the 203K program. You aren’t relying only on yourself and your lender. You need the cooperation of contractors and possibly a loan consultant to make everything go smoothly.
• You can’t do the work yourself.
Even if you’re ‘handy’ you must hire professional contractors to do any work the loan proceeds pay for.
