Further disadvantages include the fact that FHA 203K loans take longer to close than other products (60 to 90 days as opposed to the more common 30 to 45 days) and in the lending world, an extra two month wait in an ever-changing financial landscape can sometimes make the difference between making and breaking purchase deals. In addition to a high down payment, these loans have a “relatively” higher interest rate. Also, because it is a specialty loan it requires a lender with specialized knowledge, which makes securing this rehab loan complex and less certain.
Still, the key to success is for you to do your homework and learn about the various loans that are available to you. To that end, compare and contrast the FHA 203k with a product that is very popular among active military and Veterans, the VA loan, especially in regard to mortgage insurance. A snapshot of the math makes things clear. Let’s say that you are buying a house for the price of $100,000. Your final VA loan amount will be $100,000 + $2,150 = $102,150. The VA funding fee for the first time users of their entitlement is 2.15% of the “base” loan amount. There is no monthly mortgage insurance premium, as is the case with a FHA loan. In contrast, the FHA monthly mortgage insurance premium has risen and fallen based on the “financial health” of the program. The monthly premium has been as low as 0.50% and as high as 1.35%. At 1.35%, the premium for a $100,000 loan adds another $112.50/month. That’s like increasing your interest rate from 5.00% to 6.35%!