Buying a “fixer-upper” home in New York has its advantages. For example, homes in need of work are typically priced well below comparable turnkey properties that are move-in ready, so it’s a chance to save money. You also get to put your own finishing touches on the property you’re buying.
There are many ways to finance the purchase of a fixer-upper home in New York. The FHA 203k loan program is one of the most popular financing strategies among buyers. But how does this program work, and what benefits does it offer to you as a home buyer? Here’s what you need to know.
FHA 203k: Rehab Loans for New York Buyers
Some home buyers who purchase fixer-upper properties in New York use two separate loans — one to finance the purchase itself, and one to pay for the renovation work. But it can be time-consuming, challenging, and sometimes costly to obtain two different loans for one property.
That’s where the FHA 203k program comes in.
This program is managed by the Federal Housing Administration, which is part of HUD. According to the HUD website: “Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage.”
These loans can also be used to finance the rehabilitation of an existing home.
(Due to their nature, they are also referred to as rehabilitation or “rehab” loans, and sometimes FHA construction loans. All of these terms generally refer to the same program.)
Other important details of this program:
- FHA 203k loans are generally limited to homes that are least a year old, per HUD guidelines.
- A portion of the loan is used to pay off the home seller (or, in the case of a refinance, to pay off the existing mortgage balance).
- The remaining funds are then placed into an escrow account and released as needed to pay for the rehabilitation / renovation work.
- The cost of the property rehab must be at least $5,000, in most scenarios.
- The total value of the property must still fall within the FHA loan limit for the New York county in which the home is located.
Note: According to HUD, the “value of the property” can be determined in one of the two ways. It can be either (1) the value of the property before rehabilitation plus the cost of the rehab work, or (2) 110% of the appraised home value after rehabilitation … whichever is less.
Benefits of the Program
The primary benefits of the FHA 203k loan program are simplicity and cost. Lining up the financing for a home purchase can take time. Going through the process a second time to come up with the funds needed to rehab the property can be a hassle. The New York FHA 203k program greatly simplifies the process by offering a “dual-purpose” loan.
Borrowers could potentially enjoy cost savings as well. That’s because you’re only paying interest on one loan, instead of two.
Additionally, this is one of the few financing programs that allows eligible borrowers to obtain a mortgage loan for a property in need of work. With a “regular” conventional mortgage loan, the home usually has to be considered livable and move-in ready to qualify for financing. By using the FHA 203k loan, New York home buyers can finance the purchase of a fixer-upper and then make it livable.
Yet another benefit is the fact that this program is well established and has been around for a long time. Our loan officers, for example, are experts on FHA 203k financing in New York. Likewise, many contractors in the state are familiar with the program and know how to work within its parameters.