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

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. Why? Three primary reasons:

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 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 process, the odds aren’t in your favor.

So what are some of these extra steps with an FHA 203K?

  • 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 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.

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 a 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.

The key takeaway from this blog is you have options. Before jumping into an FHA 203K loan to finance your home purchase and renovation, contact us to discuss our renovation home equity loan and prepare you to get the home you want on your terms.


Other information you may be interested in...

  • Why are Fannie Mae Homestyle loans better than FHA 203Ks when renovating? - We walk through the notable differences that make Fannie Mae Homestyle Renovation loans the better choice over an FHA 203K for many homeowners when planning to finance a renovation.
  • Are Home Equity Loans Still Tax Deductible? - The Tax Cuts and Jobs Act has impacted tax deductions for many homeowners. Find out what the new tax reform will mean for home equity loans and your future renovation project.
  • Home Equity Loan Requirement Checklist - Realizing that it’s possible to turn your current home into a home you love is a great feeling. Discovering the smartest way to do it through a renovation home equity loan is even better. We'll help you gather everything you need to apply.
  • How to Qualify for a Home Renovation Loan - Did you recently discover that a renovation home equity loan is the best way to fund your renovations? We’ll walk you through the key factors that lenders consider, so you know what to expect when you apply.
  • 3 Reasons Why You Shouldn't Use a Construction Loan for Your Renovation - Has someone told you the best way to finance your home renovation is with a construction loan? Well, if so, you’ve been given bad advice! You have options - options that enable you to borrow based on what your home will be worth after the renovation!