What is a 203k mortgage?

You have been house shopping for months. You have found some that are okay but you always found something that you just didn’t quite like about them.

One day on a whim you turn down a road you’ve never been on and you stumble on your dream house! It’s a beautiful Victorian Queen Anne style architecture and it is gorgeous. However, there are some challenges. 

First of all, there is a foreclosure sign out front.

Secondly, there are missing doors, steps, and slate shingles, and it doesn’t look like it has been painted in the last 40 years.

You know you do not have an extra $35,000 in the bank to pay for these repairs, but this is a shabby house on a beautiful street and it could be made into the most beautiful house on the street.

This is the perfect situation for a 203k mortgage. You would still go through the same processes as you would for any other mortgage. You need to be approved with your credit and you have to have the appropriate down payment. What is different about the 203k is that you can have up to $35,000 financed into your mortgage that goes directly to the rehab of the home.

The extra money will be included in your monthly mortgage payment so there is no need to make two separate payments. The lender will hold the improvement money in a separate escrow account to be paid to the selected contractor.

The best value in home buying has always been to buy the worst house on the best block. This provides a huge increase in equity when repairs are made and improvements added. You will see your investment grow much faster than if you bought the best house on a not-so-great street.

This is why a 203k mortgage is a brilliant idea for those who find this type of home. These are safe mortgages, also, the lending institution must be FHA approved. You do not need to worry about getting a substandard mortgage from a sketchy company.

Another situation that would be beneficial for a 203k mortgage is if you buy a large house and you want to make it into a multi-family home. Perhaps you want to fund your mortgage with the rent you collect, or maybe you have aging parents that you want to keep an eye on but allow them their own private living space. In both of these situations, a 203k mortgage will provide you the money up front to be able to make those changes right away.

If you or a family member is disabled and you need to make the home more handicapped friendly, this is also a great reason to do a 203k mortgage. You can add a wheelchair ramp, widen doorways, and update or add a bathroom to accommodate a disabled person.

There is a little extra homework on your part when purchasing the house with a 203k mortgage. You are going to need to get estimates from contractors who can do the work. You will need to ensure that you are hiring qualified and reputable contractors. You do not want to be in a situation where you buy the house and then your contractor disappears after demolition.

An unfortunate situation would be that the estimate was much lower than the actual cost. This will cause you to have to come out of pocket to finish, or to find another contractor who can finish within the budget constraints.

A fortunate situation would be that the contractor completes the project under budget. You cannot get cash back, nor can you reduce your mortgage payments, but the remaining balance will be applied to the mortgage principle, providing you an earlier payoff.

There are many great reasons a 203k mortgage would be beneficial. Be sure to look at all the benefits and also requirements so that you can decide if a 203k mortgage is right for you.