Sometimes referred to as an FHA construction loan, the FHA 203(k) loan is a government-insured mortgage designed for homeowners looking to make renovations or for new buyers looking to rehab a fixer-upper. While a rehab loan may take longer to complete the paperwork and get approved, there are significant benefits like smaller down payments, lower interest rates and lower credit score requirements. Determining the best rehab loans of 2020 involves looking at individual requirements to qualify, required down payments and the bank or lender’s history and reputation.
The 6 best 203(k) loans of 2020
- BNC National Bank: Best for short credit history
- loanDepot: Best for mediocre credit scores
- Caliber Home Loans: Best for easy application
- New American Funding: Best for complicated credit
- Carrington Mortgage: Best for very low credit scores
- Wintrust Mortgages: Best for specialized lending and condos
|Lender||Minimum Credit Score||Minimum Down Payment||BBB Rating|
|BNC National Bank||620||3%||A+|
|Caliber Home Loans||620||3%||A-|
|New American Funding||580 (possibly lower)||3.5%||A+|
|Carrington Mortgage||500||Not disclosed||A+|
The best rehab loans of 2020
BNC National Bank: Best for short credit history
Those looking to secure an FHA 203(k) loan with limited credit history may want to check with BNC National Bank. The bank is known to utilize alternative credit data to validate your creditworthiness, including things that don’t normally report on your statement. This can help someone who would be denied by traditional guidelines get approved.
loanDepot: Best for mediocre credit scores
One of the big advantages of FHA 203(k) loans is it can be made available to borrowers with less than stellar credit thanks to the fact it’s a government-insured product. While no one can guarantee approval other than the bank, loanDepot does advertise offering rehab loans to those with credit scores as low as the mid-500s. You’ll need to contact the lender for exact details, but lower credit scores will most likely be required to pay a larger down payment.
Caliber Home Loans: Best for easy application
Several of the rehab loan options on this list require you to come into a branch location to apply. For those looking to streamline the process from home, this is not ideal. Caliber Home Loans, on the other hand, offers several online tools you can use to speed up and simplify the process.
New American Funding: Best for complicated credit
Are you someone with less than perfect credit, but it’s as a result of something that you can explain? Unfortunately, most lenders use automated systems that don’t have the capacity to input your personal reasoning. New American Funding, though, utilizes a manual underwriting process to evaluate your creditworthiness, which means you can talk to an actual person about your situation. It doesn’t guarantee approval, but it might be a necessary avenue for some situations.
Carrington Mortgage: Best for very low credit scores
Having a bad credit score is usually a deal-breaker when it comes to applying to loans. However, some lenders are willing to accept the risk and offer loans to those with less than favorable credit. Carrington Mortgage is known for accepting borrowers with credit scores in the low 500s. Be aware you will most likely get a worse rate than at other lenders, and you will most likely owe a larger down payment, but it may be your only route to approval.
Wintrust Mortgages: Best for specialized lending and condominiums
Many banks and lenders specialize in more traditional mortgage loans, and FHA loans tend to be an afterthought. Wintrust, though, is known for specializing in rehab loans and all types of loans for condo owners. If you’re looking for specialized care from experts who live and breathe FHA loans, you’ll want to check out Wintrust Mortgages.
What is a rehab loan?
The FHA 203(k) loan is a government-insured product designed to help homeowners or buyers looking to rehab and renovate a home. While the loans are insured by the government, they are still offered by traditional banks and lenders. Because of the insured aspect, though, banks and lenders are typically able to offer much better rates, require smaller down payments, and can approve those with significantly worse credit scores.
The loan works by essentially bundling your existing mortgage and your rehab funds into one refinanced loan. Because of this, FHA 203(k) loans can also be used to purchase a home that will require renovations. This gives the homebuyer adequate funds to make the purchase and also additional funds to make the rehabs. Be aware that all of the same guidelines for the rehab projects on existing homes apply to new home purchases as well.
While the 203(k) loan may sound like a dream, there are a few limitations you need to be aware of. First, the loan typically carries a monthly mortgage premium, up-front costs and possibly a supplemental origination fee. In other words, the 203(k) is not free money and still carries some of the same fees you paid when you initially purchased your home.
Additionally, there are limitations on what you’re able to cover with the loan, how quickly you have to make renovations, and the manner in which you do things (health and safety codes). The bottom line is to take your time to make sure the FHA 203(k) is a good fit for your home projects as opposed to using a different type of loan or saving up cash for the project.
How should I choose the right rehab loan?
Selecting the right rehab loan begins with choosing the right type of loan. There are two types of FHA 203(k) loans to choose from — the standard loan option and the limited loan option. If you are looking to make rehabs of $35,000 or less, you’ll want to select the limited option, also sometimes known as the streamlined version. For anything larger than that, you’ll want to use the standard plan. Additionally, the limited option requires that the home is habitable during the entire process and has limits on the type of work that can be completed.
Once you’ve decided on a loan type, it’s time to choose a lender. Choosing the right lender all depends on your personal financial situation. Make sure you’re fully aware of your current credit score and what size payments you’d be comfortable making before shopping lenders. From there, compare rates, down payments, term lengths, and all other aspects you’d consider with a traditional loan.
The bottom line
Choosing to rehab or renovate your home can greatly improve your family’s quality of life as well as increase the overall value of your home. As you know, either from experience or the millions of renovations shows on TV, these projects are not always cheap. But by using a government-insured 203(k) loan, many homeowners are able to turn their existing home into a more valuable investment better in line with their wants and needs.