That's the same question that I had when I first heard of it. Being the first-time homebuyer that I was, I figured it was just a mortgage that you took out for $203,000.
Wrong.
A 203K Mortgage is an FHA Rehab Mortgage which allows you an additional budget to perform renovations to your newly purchased single-family or multi-family home.
But, before I go into detail about how the 203k Mortgage works, let me first explain how a traditional mortgage works. When you find yourself in a financially stable place and have the desire to purchase a home, there are steps that you must go through prior to putting an offer in on a house. When researching your mortgage options, here is what you would find for a conventional mortgage.
A conventional mortgage is one loaned by a bank, credit union, or mortgage lender. The mortgage amount is the amount that you have agreed to purchase the property for with the seller minus your down payment. This amount of money is how much you are borrowing from your lender and paying back via monthly payments.
A 203K Mortgage is slightly different. In a 203K Mortgage, your mortgage amount is the amount that you have agreed to purchase the property for with the seller minus your down payment, but including as much as rest of the total amount of money that you have been pre-approved for by your lender.
If you decide to purchase a property that needs renovations or cosmetic upgrades, you have the option to either purchase the property using a conventional mortgage and then renovate with the expenses coming out of your pocket, or to tack the renovations onto your mortgage. The latter is what is known as a 203K Mortgage. The only way for this type of mortgage to work, however, is if the purchase price that you negotiated with the seller is under the amount of money that you have been pre-approved for by your lender. Here is an example:
You have been pre-approved for a mortgage of $200,000 plus however much money you have set aside for your down payment. If you find a home that needs renovating and you will not have the cash to do the work immediately, you have the ability to do a 203K Mortgage. You must agree to a purchase price less than $200,000 in order to have leftover money available to rehab the property. If you agree to a purchase price of $175,000, you will then have $25,000 available to you for rehabilitation projects.
Your loan will then reflect the total amount of money that you are spending, including the rehabilitation costs. Following the numbers I used in the example above, your total loan amount would be for $200,000, even though the seller would only be getting $175,000 of that amount. Essentially, this translates to that the bank is paying for the renovations that you make and you are paying them back the cost in your monthly mortgage payments.
As long as the total cost of rehabilitation plus the purchase price of the property is less than or equal to the amount of money in which you have been pre-approved for, then you are able to use a 203K Mortgage for the purchase of your property.
A 203K Mortgage is a much more involved process than a conventional mortgage, but I will go over the necessary steps in a separate post.
What are your thoughts on a 203K Mortgage? Is this something that you would consider doing for a property that you were purchasing?
What are your thoughts on a 203K Mortgage? Is this something that you would consider doing for a property that you were purchasing?
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