If you’re looking into remodeling your home, you may consider getting a home improvement loan. These loans are referred to as Federal Housing Association (FHA) 203k loans. While it may seem great, there are some disadvantages to borrowing money in this fashion. So, before you run to the bank, here are some disadvantages of using a home improvement loan for remodeling.
Loans Aren’t Open to Investors
If your dream has always been to buy a house and flip it, look elsewhere for your home improvement financing. For you to qualify for an FHA 203k loan, the residents you plan on rehabilitating must be your primary residence after construction is complete. Using this loan to flip a home and sell it for a profit is illegal.
When you’re in the market for a house using your loan, you may find that only some residents are covered. When you’re under an FHA 203k loan everything has to be approved by your FHA agent, including your house. The FHA agent and lender must approve all aspects of the process, from origin to completion. This approval includes what improvements you can and can’t make to your home.
Contractors Must be Lender Approved
When you start the rehabilitation process the borrower must review the contractors that make bids, but you aren’t the only person that must approve the contractor. When you’re evaluating contractor bids, you also have to be sure that the Federal Housing Association accepts the bidder. Any contractor not approved by your FHA agent is rejected, and you’re left searching for another person to do the work.
Minimum Down Payment is Required
The FHA has very strict requirements for the eligibility for a 203k loan—one of these requirements is a down payment. The down payment depends on your credit score. If your credit score is 580 or above, then you’re required to make a downpayment of 3.5%. However, if your score is lower than 580, you’re required to put down at least 10% of the loan to qualify.
The Process Can Be Lengthy
The process for FHA loans takes a bit longer because everything must be approved by the agent; there’s a lot of red tape a borrower must go through to get desired improvements. Overall, this can extend the amount of time it takes to get the construction finished and the closing process started. It’s been stated that the average time to complete the closing process can be anywhere from 45-60 days. A streamlined FHA 203k may make the process move quicker, but you have fewer options on what you can and can’t upgrade, and the amount you can borrow is decreased.