The FHA 203k program has been available for over 10 yrs as a way to provide owner occupants with funds needed to purchase and improve neglected or damaged homes. There are no "penalties" for the 3.5% down payment they require. While FHA does reqiure a fee of 1.75% , typically added to your loan balance, and a monthly mortgage insurance included in the payment, all conventional loans with less than 20% require PMI (private mortgage insurance) which costs more. In addition, that higher monthly expense reduces the overall amount of the loan you quaifly for. The FHA 203K , as with most government programs, does require a bit of red tape to get the benefit. Your loan professional may not be proficient in this type of loan and may not be willing to do them. If that is the case, you can find lenders with the right experience with the 203k or other rehab loans.
The calculations used in the FHA 203k programs are based on the initial purchase plus the costs required to improve the home. Thus the end value vs the total money required to complete the improvements, typically within 6 months, must equate to the minimum 3.5% or better. I can provide you with recommendations of lenders that have a through understanding of this program if you would like.
As for the advice to go conventional rather than FHA because of the fees, there are a great many variables to consinder in choosing the best loan for you. The FHA program will almost always qualify you for more home as their guidelines are more generous. There are a few fees unique to the 203k such as inspection fees as the work is completed and plan reviews required prior to purchase. Having someone assist you who has an understanding of the process involved with rehab loans will make the process go more smoothly. Let me know if I can be of additional assistance.
This rehab just came on the market today. If you think it is the type of project you are looking for I would be happy to show it to you. FR7054339.
We've been originating and processing FHA203K loans for 20 years and consider ourselves experts in this field if you'd like to discuss your personal situation. You mentioned the home only needing $30K worth of repairs and if this is accurate you may be able to to a Streamline FHA203K instead of a full blown one. Yes, there are different rates and fees for the K because essentially its treated somewhat like a construction loan. When using the 203K you are permitted to ask the seller for up to 6% help from the seller to apply towards prepaids or closing costs. Using a conventional loan with only 10% down you are only permitted to ask for 3% maximum help from the seller and you'd still have to finance your own renovation costs.
You can read our booklet online at http://www.myloanladies.com or http://www.1stpref.com at your leisure or you can email or phone us and we'll be glad to send out an easy to read booklet.
We can also show you a Good Faith Estimate of each loan type you are considering in order for you to make an educated decision.
We hope this helps answer your question and provides some additional information as well. Good luck!
Anne & Lora Coscia
Mortgage Loan Originators
1st Preference Mortgage, Perry Hall, MD