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Best 203(k) Rehab Loans of 2021
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.
Current mortgage rates
According to Bankrate’s latest survey of the nation’s largest mortgage lenders, these are the current refinance average rates for a 30-year, 15-year fixed and 5/1 adjustable-rate mortgage (ARM) refinance rates among others.
|30-Year Fixed Rate||2.900%||3.200%|
|30-Year FHA Rate||2.700%||3.580%|
|30-Year VA Rate||3.110%||3.410%|
|30-Year Jumbo Rate||2.950%||3.060%|
|20-Year Fixed Rate||2.810%||3.120%|
|15-Year Fixed Rate||2.390%||2.730%|
|15-Year Fixed Jumbo Rate||2.420%||2.490%|
|5/1 ARM Rate||2.900%||3.980%|
|7/1 ARM Rate||2.850%||3.890%|
|7/1 ARM Jumbo Rate||2.920%||3.870%|
|10/1 ARM Rate||3.110%||3.950%|
Rates data as of 1/13/2021
The 6 best 203(k) loans of 2021
- 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
The best rehab loans of 2021
|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+|
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.