What is an FHA 203k Loan?
The FHA 203k renovation loan program provides funds for both the purchase and renovation of a home packaged into one mortgage loan. Once the purchase of the home is closed, renovation funds are held in escrow to pay for pre-determined renovation work done by approved renovation contractors.
The purchase of a house that needs repair is often a catch-22 situation because the bank won't lend the money to buy the house until the repairs are complete, and the repairs can't be done until the house has been purchased.
HUD's 203(k) program can help you overcome this obstacle by enabling you to borrow funds for the purchase or refinance of a property plus the cost of making the repairs and improvements in one mortgage. The FHA-insured 203(k) loan is provided through approved lenders nationwide and is available to owners who will occupy the home themselves.
Down payment, credit qualification, loan limits, and other requirements are the same as standard FHA loans. Additional guidelines are set forth specific to 203k loans to provide for renovation of the home.
FHA 203k loans are available in two types:
1. The Standard 203k is intended for more complicated projects that involve structural changes, such as room additions, exterior grading and landscaping, or renovation that would prohibit you from occupying the residence. A Standard 203k is also used if your project requires engineering or architectural drawings and inspections.
2. The Streamlined 203k is designed for less extensive improvements and for projects that will not exceed a total of $35,000 in renovation and related expenses. This version does not require the use of a consultant, architect, and engineer or as many inspections as the Standard 203k. As a result, when applicable, the Streamlined 203k generally becomes the simpler, less costly option.
Mortgagors may not use the Streamlined 203k program to finance any required repairs arising from the appraisal that do not appear on the list of Streamlined 203k eligible work Items or that would:
Necessitate a "consultant" to develop a "Specification of Repairs/Work Write-Up"
Require plans or architectural exhibits
Require a plan reviewer
Require more than six months to complete
Result in work not starting within 30 days after loan closing; or cause the homeowner to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted. (FHA anticipates that, in a typical case, the homeowner would be able to occupy the property after mortgage loan closing).
Can the 203k program be used on only single-family homes?
This program is eligible for use on single family homes as well as 1 to 4 unit buildings, including the conversion of a building from a larger number of units down to 4 or less.
How is the home appraised?
The appraiser is given a copy of the contractor's bid documents to identify the repairs and remodeling to be done along with their costs. The appraiser then determines the value of the home after completion, "subject to" the improvements to be made. In some cases, up to 110% of this value may be used for loan approval purposes.
Can a 203k be used to purchase a HUD-owned property?
A 203k loan can be used to purchase a HUD-owned property that is determined by HUD to be eligible for a 203k. If other funds are used for the purchase, a 203k loan can be made up to six months following the purchase, allowing cash back to the owner
Is the 203k program allowed for use by investors?
A 203k loan can be used only by owner occupants, local governments, or eligible non-profits. However, an owner occupant can use a 203k loan to purchase and renovate up to a 4-unit building, as well as a multi-use building in conformance with certain guidelines.
How are loan funds disbursed for the purchase and renovation?
At the loan closing, funds are disbursed for the home purchase and, based on previously submitted and accepted contractor bids, renovation funds are placed by the lender in an escrow. These renovation funds are then paid in draws to the contractors as the work proceeds with final payments following inspection at completion. The actual disbursement schedule, inspections, and paperwork required are determined by the lender for each project and in conformance with FHA guidelines.
What if there are extra funds after renovation?
Any funds left over following completion of the renovation can be used to make additional allowable improvements to the property. If not used for this purpose, left over funds will be applied to pay down the principal balance of the mortgage.
Is there a time limit for the renovation?
The renovation must begin within 30 days of the closing of the loan and must be completed within the time frame established in the loan agreement. The total time for renovation must not exceed six months.
What if the home is not habitable during renovation?
The Standard 203k loan does allow for up to six mortgage payments to be included in the renovation funds to cover the period when the home is uninhabitable during renovation. A Streamline 203k, however, cannot be used if the home will not be habitable at any time during the renovation.