3 Reasons Why You Shouldn’t Rely On An FHA 203K Loan for Purchasing & Then Renovating

Don't lose the home you want waiting on a FHA 203K loan

The FHA 203K loan used to be the go-to solution for homebuyers looking to finance both the cost of purchasing AND renovating a new home. But today, that’s no longer the case and both mortgage bankers and realtors will often avoid suggesting FHA 203K’s to their clients. So are FHA 203K Loans a good idea if you’re planning a home renovation project?

Here are three primary reasons why you shouldn’t rely on an FHA 203K loan if your new home is in need of repairs.

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Mortgage Loans

1) If You Snooze, You Lose

Imagine this scenario: a home has come up for sale on the perfect street. Yes, the home needs a little (or maybe a lot) of work, but a neighborhood like this in your area is too valuable to pass on. So you apply for an FHA 203K loan because you can also borrow the money you need for your renovation in addition to the purchase price of the home. What you don’t know is how long the process will actually take. In the meantime, another buyer using a traditional mortgage finalized a deal, meaning you lost your dream house and also just wasted a ton of time.

The truth is home buyers using an FHA 203K loan are at a huge disadvantage in a competitive market because of the extra steps they have to take versus to a traditional mortgage. When you’re up against a buyer who can quickly secure a loan while you’re bogged down by the FHA 203K renovation loan process, the odds aren’t in your favor.

So what are some of these extra steps required by FHA 203K loan lenders?

  • Filling out paperwork - and lots of it. (proof of income, credit history, etc. to determine your eligibility, as well as property specs & info to see if the home even qualifies…)
  • Hiring a HUD consultant for loans over $35,000
  • Finding & hiring a contractor
  • Finalizing your renovation plans
  • Having an appraiser come out & determine the post-renovation value of the home

Keep in mind, all of this has to happen before you even purchase the home, so if those competing buyers are skipping all these steps with a traditional mortgage, it’s safe to say you’re already out of the game.

2) Big Decisions, Little Time to Think

All additional work aside, no one likes making decisions under the pressure of a ticking clock. When you’re buying in a competitive market, an FHA 203K loan forces you to rush the process. That means having to force everything from the planning of all the specific details of your renovation project to shopping for the right contractor into a very tight timeline. The stress of it all is just the start with the potential for all new issues down the road are only more likely as well.

With the alternative renovation home equity loan, you can purchase your new home with a traditional mortgage and then simply add the loan when you’re ready. The entire process can be stressful enough, so breaking it into two steps keeps things at a pace you’re comfortable with. That not only means staying competitive against other buyers to get the home you want but also making all the big decisions on your own terms. They say timing is everything, after all.

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Mortgage Loans

3) Goodbye Low Interest Rates

The truth is FHA mortgages have a number of advantages when buying a home. They require a minimal down payment and you can have less-than-perfect credit. But those benefits typically come at the cost of a higher rate. So while you’re getting the financing you need to purchase and renovate the home, you’re going to be paying a higher mortgage rate in the years that follow. So if you’re someone who could qualify for a lower rate without the help of an FHA mortgage, a smarter strategy might be to purchase the home with the lowest rate mortgage you can find and then use a renovation home equity loan to fund the renovations.

Final Thoughts on FHA 203K Rehab Loans

The key takeaway from this blog is you have options. Before jumping into an FHA 203K loan to finance your home purchase and renovation, you should know that there are loans out there — like our renovation home equity loan which provides the ease of a home equity loan with the borrowing power of a construction loan. Homeowners get the best of both worlds and tons of helpful insight to make the right decisions before purchasing or renovation your home. Contact RenoFi to discuss your options and prepare you to get the home you want on your terms.

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Other information you may be interested in...

  • 3 Reasons You Shouldn’t Use a Cashout Refinance When Renovating - Refinancing can often be a dumb way to pay for your renovations. If you’re trying to lock in a significantly lower rate, you may be an exception, but for most homeowners, refinancing means throwing money away and getting less out of it. Let us explain. Here are 3 reasons why you shouldn’t use a Cashout Refinance when renovating.
  • What if My Contractor Refuses to Work with a Construction Loan? - Did you know contractors actually hate construction loans? Since these loans will typically cost your contractor more time and money, it’s hard to blame them. But when your contractor actually refuses to work with a construction loan completely, then what do you do?
  • The 6 Dumbest Things Homeowners Do When Paying for a Renovation - You’ll have a lot of decisions to make during your home renovation—how to pay for it is probably the biggest. That’s because making an investment in a home you love right now shouldn’t end up costing you for years to come. But too often homeowners make really bad choices when it comes to financing their project, and that’s exactly what happens.
  • Why Contractors HATE Construction Loans - You finally found a contractor, and you’ve started looking for a construction loan. Hold up! There’s something you should know: contractors HATE construction loans.
  • 4 Simple Steps to Your Renovation with RenoFi - At RenoFi we break the renovation financing process into 4 simple steps that will walk you through the initial phase of getting your renovation off the ground. Here is what you need to know...
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