For many first-time homebuyers, the biggest obstacles to overcome when buying a house are likely the down payment and credit score. For some, their credit history may not be as established as a mortgage lender would like or it could have become damaged from a series of financial missteps. Credit is a topic for another day; today we are going to focus on the down payment. Let’s be honest with one another, saving money is hard. So, our attention is piqued when we hear things like, “No down payment”. But how true could that statement be?
You may have heard, “it is a good idea to meet with your mortgage loan originator (MLO) before house hunting”. If you haven’t, well let me tell you, “it is a good idea to meet with your MLO before house hunting.” Even though I’m writing this from my office, inside one of the largest independent mortgage banks in Kentucky, this tip is not something concocted by MLOs to get you in the door. Getting prequalified can save you some heartache, speed up the process, and could even help get you the house you want!
Did you know that the FHA 203k Loan is a just one renovation loan option? While this loan has helped lots of people turn their current home into their dream home and several others in creating the home they’d been searching for, it isn’t the only option for this kind of lending! We’ve mentioned the option of a HELOC which requires established home equity but we would be remiss if we didn’t mention that there were other mortgage products available outside of the 203k.
As a first-time homebuyer, I was told an escrow account was set up for me. That’s about as far as my knowledge of escrow accounts went—I had one. So, before we start talking about what makes up a 203k Loan Escrow Account, let’s establish what an escrow account is and what it isn’t.
How to Pick a 203k Lender
Is the FHA 203k Loan difficult? Only if you don’t know what you are doing. The 203k has a few more steps than the standard FHA loan but that shouldn’t scare you away because your lender should know the in’s and out’s. Mortgage banks exist to lend money so people can finance their homes, mortgage loan originators or loan officers exist to walk you through the process and answer questions along the way. So, when it comes to selecting your FHA 203k Lender being guided by someone who has been through it will prove to be a huge benefit! Think about it by way of illustration; consider the difference between someone who had hiked the Appalachian Trail leading you on the trail versus someone who had read a couple books on the Appalachian Trail but had never been there before. Which would you choose?
Your dream home may be the first home you purchased but for many people this is not the case. For most families it isn’t until they have been homeowners for several years that they consider searching for their dream home. Searching for your dream home is one thing, while finding your dream home is another entirely, especially in this housing market. We have seen an extreme shortage of homes available to purchase. In fact, one of our mortgage loan originators has 16 families who have prequalified for homes, they just cannot find one to purchase.
Are there contractor requirements for a 203k Loan?
Truly the only requirement is that your contractor must be licensed and cannot be you. You see, the 203k does not allow for “do it yourself” style work. But don’t worry this is good news! By not allowing for DIY improvements, the projects are more likely to be completed within definite period by a professional remodeler. This offers protection for the mortgage lender and for you. At the end of the day, the you are wanting to make improvements to increase your home’s value and enjoy it more fully. If the improvement projects aren’t completed or don’t meet industry standards, it will likely lead to more headache and could even lower your home’s value.
There are so many options out there for calculating your mortgage payment with plugging in just a few figures; the loan amount, interest rate, and the life of the loan.
When it comes to mortgages from a renovation loan, like the FHA 203k Loan, the concept is the same but how we achieve the loan amount is a bit different. Typically, the loan amount is calculated by subtracting the down payment from the purchase price but when calculating the loan amount for a 203k Loan we must factor in the renovation costs. Below we’ve included an equation to provide a general calculation of a 203k loan amount, as well as, a list of average home renovation costs when considering estimations for your renovation budget.
The short answer to the question, “What does the FHA have to do with Renovation Loans?” is, “everything”. If the Federal Housing Administration or FHA was a tree, the 203k Loan would be one of its branches. Simply put, the FHA is a mortgage insurer. The administration was created amidst the high number of foreclosures and defaults during the Great Depression. They served to encourage banks through incentives to give home loans to low-medium income families, first time homebuyers or those with a low credit score. The result was a stimulated economy and more American homeowners. Today we see the FHA loan products acting in the same way; many first-time homebuyers find themselves interested in the FHA loan because of the low down payment requirement as well as the reasons just mentioned.
