The FHA's 203(k) loan can help you buy a fixer-upper

Here’s a common scenario that homebuyers face when they want to buy fixer-uppers: The buyers need to finance the purchase with a mortgage, but the mortgage lender will only provide funds for homes in good condition.

In today's market, many foreclosed and short-sale homes need major repairs since their owners couldn’t afford basic maintenance. Buyers who would like to earn sweat equity through purchasing and rehabbing such properties are often shut out of the mortgage market.

But the Federal Housing Administration's 203(k) program makes it possible for these types of would-be owner-occupants to get loans for fixer-upper properties (the 203(k) program is not available to investors).

If you're interested, here are a few things you should know about 203(k) loans:

-A seller might be reluctant to accept a purchase offer that’s contingent on FHA 203(k) financing because of the extra time and uncertainty involved in closing these loans.

-The program allows homeowners to do their own rehab work, but it will hold you to professional standards.

-You’ll be allowed a maximum of 6 months to complete the work whether you hire professionals or do it yourself.

-While loan proceeds can only be used to pay for professional labor--not homeowner labor--doing the work yourself could mean a smaller mortgage.

The FHA 203(k) program isn’t for the faint hearted. It takes two of life’s most expensive and stressful transactions--buying a home and doing major renovations--and adds mortgage lenders and government, two of the most difficult institutions to work with, to the mix.

But this loan program can make an otherwise impossible home purchase a reality for determined homebuyers.

For more information about this type of loan, see my articles: 

The FHA 203(k) mortgage: Home renovation helper

An Introduction to the FHA 203(k) Loan

Applying for an FHA 203(k) Loan

How to Finance a Fixer-Upper