When you find a home that needs work, you are not out of luck unless you have the cash in the bank to make the changes the home needs. The 203K loan can provide you with the funds you need to purchase and fix up the home. The bad news is that the rates can be as high as 1 percent more than a standard FHA loan. The good news is that there are ways to find the best 203K loan rates without getting in over your head.
Make Your Application Attractive
The first step is to make sure your loan application is as attractive as possible. What does this mean? Basically, you should go over your credit, income, and assets with a fine toothed comb and make any changes that you can to make it a strong part of your application. Let’s take a look at some examples:
Credit and it Impacts your Interest Rate
Your credit score is 640, which in the eyes of the FHA is not too bad. You could probably get approved for FHA financing with this score. But you have several late payments in the last year on a few of your loans and some of your available credit limits are almost maxed out. Despite the fact that your credit score is within the FHA range, the credit history itself could make the lender increase your 203K interest rate.
If you looked over your credit before applying for the 203K loan, you could take the time to fix these mistakes. Bring the accounts that are in delinquent status current and pay down the balances that are above 30 percent of your available credit. This will not only increase your credit score but will also help the lender provide you with a lower interest rate because you pose a lower risk.
Debt-to-Income Ratio and your Interest Rate
Let’s say you have a great credit score of 700. You have no late payments and your credit is not over-extended with any lender. However, your debt-to-income ratio is borderline high according to FHA standards. Right now those standards are 31 percent on the front end (principal, interest, taxes and insurance) and 43 percent on the back-end (all monthly payments including your mortgage, student loans, car loans, and credit cards). If you have a debt-to-income ratio of 32/44, it could render you an approval because the FHA is flexible, but leave you with a higher interest rate.
If you reviewed your DTI before you applied for the FHA 203K loan, however, you could lower it by paying items off. Let’s say your credit cards had a balance of $500 and $1,000 respectively. If you paid one or both of them off, it would decrease your monthly obligations and could lower your DTI enough that you are below the FHA standards. This would enable a lender to provide you with a lower 203K rate.
Shopping Around for the Best 203K Loan Rates
Aside from perfecting your loan application by making sure your credit, income, and debts are in line, you need to shop around. Even with perfect credit, stellar debt ratios, and stable employment, you will not find the same two interest rates from any two lenders. Each bank has a threshold of risk they can take and minimum interest rates they charge.
If you shop around you can find out what rates each bank offers you. It is also possible to negotiate interest rates in order to secure the best one for you. For example, some lenders will lower your interest rate if you put more money down on the home. Others will increase your rate if you wish to lower your closing costs.
In general, you are in control of your 203K loan rates. If you do the work necessary to make your loan application as attractive as possible and shop around, you could find the best rates available to you. If you jump at the first rate given to you, it might not be the lowest around. Take the time to do your homework and work on your credit and debts at least one year before you wish to apply for the mortgage to ensure the best interest rate for your loan.