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Purchase and remodel with an FHA 203(k) loan

By Michele Lerner
Mortgage Credit Problems Columnist


You may think your credit is too poor to qualify for a home loan, but mortgages offered by the Federal Housing Administration (FHA) tend to be less stringent than the guidelines conventional lenders set. FHA mortgage lenders may allow credit scores as low as 500, although most require 620 or better with the minimum down payment.

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Not only do FHA loans offer less stringent qualifying guidelines, but they also provide flexibility for different home purchase situations.

FHA 203(k) loans to buy and repair a home

For instance, if you have steady income, some savings and have reduced your debt so that you can comfortably afford a mortgage payment, you may be able to rebuild your financial security by buying a less expensive home that needs a little work and refurbishing it. The 203(k) FHA loan allows you to wrap home renovation costs into a home purchase or refinance.

An FHA 203(k) loan can be particularly useful for purchasing a foreclosure or short sale home that is in less-than-perfect condition. These loans carry the same FHA loan limits, which vary by area, as standard FHA loans, though in this case the maximum loan amount includes the costs of renovations as well that of purchasing the home.

FHA 203(k) loans have the same 3.5 percent down payment as standard FHA loans and also require mortgage insurance premiums. Interest rates for these loans may be slightly higher than regular FHA loans, depending on the lender.

FHA 203(k) loans have some restrictions on the amount to be spent on remodeling and the types of projects. A minimum of $5,000 must be spent on rehabilitation. Borrowers who want to spend under $35,000 can use a "streamline" 203(k), while those who need to spend more will also need an inspection by a HUD-approved cost consultant. Repairs must begin within 30 days of the loan closing and be finished within six months, and the loans are only available for use with a principal residence.

Refinancing with a FHA 203(k) loan

The FHA 203(k) loan is also available for refinances where your home needs improvement. The maximum loan amount depends on certain rules, and you need to have enough income to qualify for the new loan and good enough credit to be approved. Contact a qualified FHA lender to see whether this is an option for your refi.

Whether you are refinancing or purchasing a home with an FHA 203(k) loan, you need to carefully follow the guidelines set by HUD for the improvement projects, since there are some restrictions on frivolous or high-grade home improvements.

Working hard to improve your credit score and reduce your debt can be the best way to qualify for an FHA loan.

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