Should You Use a 203k Loan or a VA Loan? Which Loan is Right For You

Posted by Lauren Schneider on Wednesday, December 4th, 2019 at 8:19am.

203k Loan vs. VA Loan: Which is Right for Me?Both the 203k and VA loan have a reputation for being buyer-friendly options that can help Northgate homeowners manage their budgets. But there are a few key differences to know that can make it easier for homeowners to choose between them. Learn more about the requirements, eligibility, and terms for each type of loan before applying.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

The Basics of Each Loan

A 203k loan can be used to either buy or refinance a home that needs repair work. It's a type of FHA loan created to breathe life into decaying neighborhoods. These loans incentivize homeowners to improve their properties in an effort to increase the value of the neighborhood. Interest rates are lower than the average renovation loan, and lenders are generally more lenient when setting the terms and conditions.

Like the 203k, a VA loan is also backed by the government. However, the terms for qualifying veterans are typically better than a 203k loan. With a 203k, buyers are still required to put down a 3.5% down payment (based on the cost of both the property and the estimate repairs), while a VA loan may not require a down payment at all. Both loans set a similar minimum credit score for homeowners at around 650.

Eligible Properties

These two loans diverge when it comes to the types of properties that homeowners purchase with either option. A VA loan requires the buyer to purchase a home that is considered livable, whereas a 203k loan does not. In fact, the restrictions are so lax for the 203k loan that homeowners can use it to build homes almost entirely from scratch. (The only requirement is that a small piece of the original foundation remains on the property.)

The Underwriting Process

The underwriting process for both loans will depend on the lender and the amount the homeowner is borrowing. Homeowners taking out a standard 203k loan will typically be subjected to a longer and more stringent underwriting process than those applying for the VA loan. The repairs for a 203k loan property can include any of the following upgrades:

  • Patios/decks
  • Remodeled rooms
  • New flooring
  • Retrofitted plumbing/HVAC system
  • Home additions (e.g., master suite, etc.)
  • New siding

Regardless of which loan a homeowner chooses, there will be some degree of oversight from the lender when it comes to which repairs are made and who is allowed to make the repairs.

Can VA Loans Be Used for Home Improvements?

The VA loan is meant for buyers who want to purchase a property that is already in good shape. That being said, there are VA home renovation loans that can help homeowners purchase a fixer-upper. A VA renovation loan will charge up to 2% of the home improvement costs of repairs in addition to the origin fee and funders fee.

The main thing for homeowners to know is that because major renovations were never the intention for VA loans, the improvements and approval process tends to be longer and more complicated than other types of home improvement loans. For example, with a 203k loan, there's an option to roll the first six months of mortgage payments into the loan if the buyer needs to stay elsewhere during construction. These perks may make the 203k loan a better choice for homeowners who need to make severe changes to the home.

There's no doubt that a VA loan is a great option for qualifying veterans and spouses. The choice between the two comes down to the type of property and the time needed to get it up to a livable standard.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

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