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Purchase fixer-upper rental property with bad credit using an FHA 203K Loan

Own fixer-up rental property with bad credit using the FHA 203K Renovations Mortgage Loan. It's easy to qualify with a required credit score of 580 and 3.5% down payment.

Buying fixer-upper rental property with bad credit is made easier with an FHA mortgage-backed loan. Home flipping t.v. shows make real estate investing look glamorous and lucrative. But if you have bad credit, it’s generally difficult to purchase fixer-upper rental property.

First-time investors with bad credit can fare better by investing in fixer-upper rental property purchased through the FHA 203K Renovation Mortgage Loan Program. 203k loans are guaranteed by the FHA which means lenders assume less risk. As a result, borrowers find it easier to get approved with imperfect credit while still getting a low interest rate.

But there’s a catch. You must live in the rental property.

It’s not a terrible requirement when buying rental property with bad credit and definitely not a deal breaker. Plus, it’s only a one-year occupancy requirement for FHA 203K loans.

Distressed properties are popular with investors because they provide a good financial deal when sellers are motivated to get rid of the property. But distressed properties need repairs; and sometimes lots of repairs.

Details of the FHA 203K Mortgage Loan Program.

FHA 203K loans aren’t designed for investors

While FHA 203K mortgage loans aren’t designed for investors, if you purchase a 2-4 family unit, live in one unit (for a minimum of 12 months), you are essentially an investor. And, as an owner occupant, you can take advantage of the 203K Renovation loan for distressed properties.

How 203K Renovation Loans work

An FHA 203K Renovation Mortgage Loan lets you borrow money for a mortgage and home renovations at the same, lumping the funds together as one mortgage loan.

  • Loan amounts are set by FHA County loan limits. For example, the maximum 203k loan amount in a designated low-cost area would be $566,425 for a 4-unit property and $679,550 for a 4-unit property in a high-cost area.
  • 203k loans are guaranteed by the FHA which makes them easier to get approved, especially when you have bad credit.
  • You borrow the purchase amount plus the necessary improvements amount.
  • You can borrow enough to finance 110 percent of the home’s projected value after improvement. Appraisers will review your plans and take the future value of your home into account.

Benefits of the 203K Renovation Loan

The 203K loan allows you to purchase distressed multi-unit property, like a duplex or 4-unit apartment, fix and upgrade the property, then rent out the units. Even though you are required to live in one unit, there’s still room to make money from the remaining units.

Living in your rental property can be an advantage when you’re starting out in real estate investing. You get a chance to experience making major repairs, upgrading kitchens and bathrooms, dealing with renters, creating leases, screening tenants, collecting rent money and maintaining property before you venture into larger apartment units.

Requirements for 203K Renovation Loans

The 203K loan combines the purchase and repair funds, but you still need to have 3.5% down payment and money for the closing costs.

  • Requires 3.5% down payment. Down payments can be gifted from family members or from a state or county down payment assistance program.
  • Generally, you must have a credit score of at least 580 to be eligible for the 3.5% down payment. Many FHA lenders require borrowers to have a credit score of 620 or higher.
  • For credit scores between 500 and 580, a minimum of 10% down payment is required.
  • Requires a licensed contractor to complete ALL the work. It’s best to work with a General Contractor who has experience with FHA 203k loans.

Problems with the FHA 203K Renovations Program

Tons of paperwork is required for the FHA 203K Renovations Mortgage Program. In addition to the paperwork, ALL renovation work must be done by licensed contractor that sees the work through from the beginning to end. Unfortunately, you or your trusted handy man are not allowed to do the work.

How to find an FHA Approved Lender

Find an FHA-Approved Lender at HUD. Applications must be submitted through an FHA approved lender, input your state, county or city to find a lender near you.

You can also ask your bank or mortgage broker about the FHA 203K Mortgage Loan Program.

How to find Multi-Unit Properties

You’ve got to put in work to find multi-unit properties. The best action to take is call realtors in the area you want to purchase. Realtors often have resources you can’t find by searching on your own. Other ways to find multi-unit properties is real estate sites like:

These real estate sites have apps that can send property listings and alerts directly to your cell phone.

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