20% down or 203K Loan - which one to choose?

Asked by qfos, Fremont, CA Sun Feb 17, 2013

We are in the process of buying a house (our offer has been accepted, but sale hasn't closed). The house needs some work. Our options at this point are:

1) put 20% down and get a 203K loan
2) put 15% down and spend 5% on fixing the house, incur monthly mortgage insurance

Whats the best thing to do?

Thanks in advance for your help!

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14
Shane Milne, Mortgage Broker Or Lender, South Jordan, UT
Sun Feb 17, 2013
BEST ANSWER
The title of your post says "20% down or 203k loan"... but then one of the options you laid out is putting 20% down AND getting a 203k loan. I am a bit confused. But going along with the question you wrote in the body of your post...

However if the home is in decent condition now (meaning an "as is" appraisal will pass lending requirements), and you have a good credit score, then I'd strongly suggest putting 15% down for a few reasons.

First, with an FHA 203k loan, even with 20% down, you will have mortgage insurance. With FHA there is always an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, and at 20% down the annual mortgage insurance is 1.2% (if the loan term is longer than 15 years & loan amount no more than $625,500, 1.45% for loan terms longer than 15 years & loan amounts above $625,500, .35% for loan terms of 15 years or less & loan amount no more than $625,500, or .60% for loan terms of 15 years or less & loan amount above $625,500, with a 15-year term or less & at least 22% down then there is no annual mortgage insurance). Those premiums will increase on April 1st (the FHA case # has to be ordered before then to stay at current levels).

Second, an FHA 203k rehab loan requires an additional approval process for the remodel portion of the loan - the contractor, their bid, their insurance, etc. needs to be reviewed. Then depending on the type of improvements you are doing to the property, there could be various required inspections before the rehab funds are disbursed to the contractor OR you must complete those improvements within 6 months of the loan closing. There are also some minor additional costs for an FHA 203k rehab loan, such as the supplemental origination fee, a title update, and an appraisal re-inspection fee. Additionally, FHA 203k loans can take a little longer to complete because there are variables involved (such as, are the improvements you are planning on doing to the property going to increase the value of the property by the same amount?).

Third, with a conventional loan and 15% down you are correct, there is mortgage insurance, but you have some options on how to deal with that mortgage insurance. You could pay the traditional annual mortgage insurance, which if your credit score is 720 would be .32% per year, or you could pay a 1 time single premium of 1.18% (remember FHA has the 1.75% upfront premium + an annual premium depending on the guidelines I mentioned above), or you could even take a slightly higher interest rate in lieu of paying either the annual mortgage insurance or the 1 time single premium. With the conventional loan and fixing it up after you purchase, you'd wouldn't have any stipulations on what type of improvements you could do to the property or what time frame they'd need to be completed in.

Plus, you said your offer has been accepted. I am not sure if you used the standard California Association of Realtor's contract, but within it, on Paragraph 3C(1) it specifies if you are going to be using conventional or FHA financing. If you selected conventional financing and switch to an FHA 203k loan, the seller may take issue with that.

Shane Milne | Lending in all 50 states | NMLS #81195
shane@thebesthomeloans | 949-273-4161 direct
3 votes
Here you can find the complete list of FHA approved lenders in Arizona with expertise in underwriting 203(K) loans:

http://203klenders.org/arizona-az/
Flag Tue Jul 26, 2016
thanks for your (and everyone else's) response. We were thinking of doing 203K rehab loan, which given its complicated, lengthy process and limitations (requiring certified contractors), is probably not ideal for us.
Flag Mon Feb 18, 2013
arianna.levi, Home Buyer, Houston, TX
Tue May 5, 2015
The 203k loan is officially stylized as 203(k), because 203(k) describes the section of the National Housing Act (NHA) that allows FHA financing to be utilized for house rehabilitation. Compare this to FHA’s standard single-family loan, which is officially called a 203(b) loan. But most know the FHA rehab program simply as the “203k loan.”

It’s important to note that there are two sub-types of 203k loans: the full 203k, and the Streamline 203k, also called the “Streamline (k)” loan.

Have you found a home that you love, but it’s in bad shape? The 203k loan may be a perfect way to purchase a home that is a little rough around the edges.

The FHA 203k rehab loan has become a popular loan choice in today’s market where many homes need a little, or a lot, of TLC.

The 203k loan allows a buyer to finance the purchase price of the house and the cost of needed or wanted repairs – all with one loan. No scrambling around before closing trying to repair the home so the bank will lend on it. No pounding the pavement looking for a 2nd mortgage to finance repairs. No living with a leaky roof for five years while you save up the money to fix it. A 203k loan can take care of these repairs and more with one loan transaction.

Find FHA 203k Loan Eligible Borrowers - http://fha203kloan.org/203k-eligible/
0 votes
Dana Lindberg, Both Buyer And Seller, Phoenix, AZ
Sat Sep 7, 2013
Getting a 203k loan is not always hassle-free. At times, the process can be lengthy. Talking to experts makes getting approve with 203k loan easier. I found a site which will give you a detailed guide and other valuable information about 203k loan. Check out http://www.cfs203k.com.
0 votes
Mike Young, Other Pro, Fairfield, CA
Sun Jun 2, 2013
Get the best of both worlds with a FannieMae Homestyle loan. Renovation or fix up money and no MIP with 20% down.
0 votes
Thomas Young, Home Buyer, Phoenix, AZ
Sat May 25, 2013
From my experience with 203k loans, the best advice is to use a lender that offers assistance via third party with 203k processing.
This shortens the closing time by weeks. Try http://www.cfs-mortgage.com/203k for more information.
0 votes
Thierry Abel, Mortgage Broker Or Lender, Corte Madera, CA
Sat May 25, 2013
about 10% down with no MI for a combined loan amount < 750K ?

Give me a call for more details
0 votes
Thomas Young, Home Buyer, Phoenix, AZ
Fri May 24, 2013
From my experience with 203k loans, the best advice is to use a lender that offers assistance via third party with 203k processing.
This shortens the closing time by weeks. Try http://www.cfs-mortgage.com/203k for more information.
0 votes
Paul Welden, Other Pro, Tempe, AZ
Thu Feb 28, 2013
With the right 203k team (borrower with their paperwork in order, lender, Certified 203k Contractor and experiended 203k Consultant), FHA 203k loans can be closed in 30 days, just like all other loans.
Web Reference:  http://203kContractors.com
0 votes
Paul Welden, Other Pro, Tempe, AZ
Thu Feb 28, 2013
Reference Mortgagee Letter 11-35.

With 22% down payment and a 15 yr loan, there is no mortgage insurance on an FHA loan, which includes the FHA 203k Loan. However, this option is not eligible on FHA case numbers established after March 31, 2013.

If the work on the property is regarding the safety or habitability of the property, the property may deemed insufficient collateral for the loan causing the lender to deny the loan based on property conditions. Thus requiring seller to perform renovations or buyer (you) doing a renovation loan like the 203k, which can also be used solely for cosmetic or buyer preferences.
Web Reference:  http://203kContractors.com
0 votes
Claudia Mull…, Mortgage Broker Or Lender, Fremont, CA
Sun Feb 17, 2013
Assuming $417k loan amount.

Why not put 10% down and get a 10% second?
The 203k is FHA with heavy MI fees up front and monthly.
You can get a self insured loan with 5% down
MI is presently tax deductible.
Your options are many.
I am in Fremont.
Cgravelle@ diversifiedmg.com. If you would like to discuss in more detail.
0 votes
Thierry Abel, Mortgage Broker Or Lender, Corte Madera, CA
Sun Feb 17, 2013
With 15% down, you do not need Mortgage Insurance, and can break it into a 80/5/15
We do first and second combo.

Here are our rates and maximum combined loan to value for our 2nd (Home Equity Line of Credit)

Combined loan -to value 80.01 - 89.99% Prime + 1.99 = 5.24%
Combined loan 80.00 and below Prime + 1.49 = 4.74%

Max combined liens: 89.99% to $750,000
85.00% to $1 Million
Combined liens to $1M is our absolute max

Cheers
0 votes
Thierry Abel, Mortgage Broker Or Lender, Corte Madera, CA
Sun Feb 17, 2013
We are one of the rare lenders that offer 203 K for up to the "High Balance" limit!

Feel free to contact me if I can assist
0 votes
Joe Patel, Agent, San Ramon, CA
Sun Feb 17, 2013
Like John indicated I can't give you advise but here is my 2 cents.If you are using 203K loan,you could include repair cost in your loan with 20% down so you don't need to pay mortgage insurance.Good Luck!!!!
0 votes
John Souerbry, Agent, Fairfield, CA
Sun Feb 17, 2013
Your question isn't one a real estate agent can answer. Best to speak with your tax pro or financial planner.
0 votes
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