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FHA 203k Loan Costs and Pitfalls

Before You Use an FHA 203k Loan

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Using an FHA 203k loan allows you to borrow enough to finance a home and make improvements. What’s the drawback? FHA 203k loans have additional costs and requirements that you should be aware of. It may make sense to use an FHA 203k loan, but you’ll want to know what you’re getting into.

 

FHA 203k Loan Interest Rates

Interest rates on FHA 203k loans are a little higher than other FHA loans (by about 1% or so), so you’ll pay more over the life of your loan. Lenders have to do extra work to track your project and lock an interest rate for the longer application process.

However, FHA 203k loans are guaranteed so lenders have less risk. Rates may still be lower than you can find without FHA backing.

Closing and Maintaining an FHA 203k Loan

Like most loans, FHA 203k loans have closing costs. You may not pay all of these costs out of pocket when you close, but you’ll pay them eventually.

You’ll pay 1.75% up-front as well as 0.55% ongoing for FHA 203k loan insurance. This protects the lender in case you are unable to repay. The lender may also charge a 'supplemental origination fee' (the greater of 1.5% or $350).

There are also costs related to the improvement work. An FHA approved consultant is required to review your plans before approval, and they’ll inspect work as it’s completed. All of this costs money.

Other standard closing costs such as appraisal fees are also part of any FHA 203k loan.

 

Health and Safety

To get an FHA 203k loan, you’ll have to address health and safety issues and meet building codes. Lead paint, electrical problems, and other items may be added to your project list. This may not matter to you if you plan to live in a safe and healthy environment anyway.

 

Restrictions

Only owner/occupants and nonprofits can use FHA 203k loans. Investors and 'flippers' cannot take advantage of the program. However, you can use an FHA 203k loan to make additions to a home that you eventually rent out.

FHA 203k loans must be for improvements that cost at least $5,000, and work must be completed within 6 months. For small projects under $35,000 you may want to use a Streamlined 203k instead; the process is less cumbersome. If you underestimate costs, you cannot increase your loan amount so it's important to work with good contractors.

Luxury items cannot be financed with an FHA 203k loan. Check with FHA before you go for gold plated faucets.

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