203K Mortgage Loan Risk To Home Buyers

Performance Property Real Estate Question

Q: I’m trying to buy my first home. I am really excited because I actually found a home that’s within my price range. The house is a fixer upper that needs work but my mortgage broker said I can still get a mortgage for it and I can actually borrow the money as part of my mortgage to make the repairs. Do you think that’s a good idea? Susan, Bloomfield, NJ

A: Your mortgage broker is likely referencing a type of construction loan for residential home buyers called a 203K. Section 203(k) insurance allows homebuyers to finance both the purchase of a house as well as the cost of its renovation through one single mortgage. Conceptually, a 203K loan is a great deal for homebuyers, especially first-time home buyers because it allows you to finance home renovations at much lower interest rates than you otherwise would be able to and thereby allows you to gain instant home equity. For that reason, I definitely think you should at least explore your options with a 203K loan on this home you want to buy with your mortgage lender. However, it’s normally better to buy a home that doesn’t need any repairs or renovations than to buy a home that is in disrepair—if you can. Although there are obvious financial benefits to buying a home with a 203K loan, there are risks and drawbacks. The basic drawbacks to getting a 203K mortgage loan include more paperwork, higher loan origination costs as well as paying a mortgage insurance premium. The biggest risk associated with getting a 203 loan to buy a home is in dealing with contractors who have to do the renovation on the home. I have seen nightmare situations where contractors have ripped off 203K homebuyers who subsequently ended up facing foreclosure. To reduce your risk, get help from your mortgage broker and be realistic about the scope of the renovations that are possible with your budget–there always needs to be some slack in your home renovation budget to allow for cost overruns and keep in mind there are only so many renovations that can realistically be done within the framework of a 203K mortgage loan. Thanks for your question, Susan.

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