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FHA 203(K) Loans

An FHA 203(k) loan allows you to buy or refinance a home that needs work and roll the renovation costs into the mortgage. 

Types of FHA 203(K) Loan

There are two types of FHA 203(k) loans: 

• The limited — sometimes referred to as "streamline" — and 
• The standard.

Limited and standard 203(k) loans have different rules about how much you can borrow for renovations and what you can do with the money.

Limited or Streamline FHA 203(k) loans

The maximum amount you can borrow with a limited 203(k) loan is $35,000, which makes this loan a good fit for those looking to make cosmetic fixes or some repairs, including those recommended by the home inspector or FHA appraiser. 

Examples of some projects that you can use this loan for are doing your kitchen and bathroom, replacing carpet and appliances, or another project that costs $35,000 or less.

Standard FHA 203(k) loans

The maximum amount you can borrow with a standard 203(k) loan is when it is added to the original FHA loan amount and does not exceed the FHA loan limits for the county where the house is located. FHA standard 203(K) also has a minimum required draw of at least $5,000.

The standard FHA 203(k) loan can be used for a renovation project involving major structural work and even for full demolition and reconstruction, so long as the original foundation stays in place.

Examples of some (but not all) projects that you can be financed with a standard FHA 203(k) loan are shown below: 

What can FHA 203(K) loans be used for?

Among other things, FHA 203(k) mortgages can be used to:

• Improve a home's functionality or attractiveness.
• Eliminate health and safety hazards.
• Rehab the plumbing or sewer systems.
• Install or repair the roof, gutters, and downspouts.
• Install or replace the flooring.
• Improve major aspects of the landscaping.
• Ensure accessibility for a disabled person.
• Make a home more energy-efficient.

• You can use it to make energy-efficiency upgrades like installing a new furnace, windows, or attic insulation. You can get a 203(k) loan to pay for 100% of the cost of energy-efficiency improvements. You don't have to get those improvements appraised. Still, they do have to be cost-effective, meaning they'll pay for themselves over their useful life. The HUD inspector will make the call.
• You can use the loan to make your mortgage payments if you can't live in the house until the work is done. 
• You can rip the house down if you plan to build something in its place. You are good to go as long as you keep the home's foundation.
• It is possible to use a 203(k) loan to remodel a home that includes some commercial space, as long as you use the money only for projects in the residential part of your home and the amount of commercial space doesn't exceed these limits:
  • 25% for one-story building
  • 49% for two-story
  • 33% for three-story building
• You can use a 203(k) for a condo unit, but your condo must have FHA approval or meet VA, Fannie Mae, or Freddie Mac guidelines. Also, your building can have no more than four units, though multiple buildings exist in the association.

What can FHA 203(K) loans Not be used for?

• You cannot use it to buy a new construction home. 
• The house you are fixing has to be at least a year old.
• The purchaser must live in the house, and the house must be at least one (1) year old.
• The improvements cannot be something the FHA deems luxuries, like a swimming pool or an outdoor kitchen, or buy and install a high-tech toilet. They are generally not eligible for either Streamline or standard FHA 203(K).

Some Information about FHA 203(K) Loans:

• 15- or 30-year term option
• ARM or fixed-rate option
• The interest rate is a tad higher than the market. 
• Higher fees compared with equity or other FHA loans for such things as title checks, architectural plan reviews, appraisals, and FHA inspections 
• No balloon payment 
• Loan amount = projected value post-rehab, including the cost of the work. The loan amount cannot exceed the allowable FHA loan in your county. 
• FHA loans take longer to close than conventional mortgages 
• More paperwork than a straight mortgage loan

What are the requirements for getting an FHA 203(k) Loan?

Although it has a specific purpose, the 203(k) loan is still an FHA mortgage. This statement means it has more lenient qualification requirements than a conventional mortgage and is subject to FHA loan limits.

• Credit score: You'll need a credit score of at least 500 to qualify for an FHA 203(k) loan, though some lenders may have a higher minimum.
• Down payment: The minimum down payment for a 203(k) loan is 3.5% if your credit score is 580 or higher. You'll have to put down 10% if your credit score is between 500 and 579. 

• Down payment assistance may be available through state home buyer programs, and monetary gifts from friends and family are permitted.
• Max loan amount: FHA loan limits vary depending on where you live but are generally capped at $498,250 in low-cost counties and $1,149,807 in high-cost counties for single-family residences.
• Foreclosure: In most cases, a foreclosure within the past three years will prevent you from qualifying for an FHA loan.

Property Requirements for FHA 203(K) Loans

1. The property must be used as your residential property. You cannot use FHA 203(K) for your investment property. 
2. The repair or innovation must be completed in six (6) months.
3. You can DIY with a 203(k) if you show you have experience and know how to DIY. You can do the work yourself or act as your general contractor if you can prove you have the experience and can complete the job on time (the maximum timeframe is six months). 
4. When and if you DIY, you can only use the 203(k) proceeds for supplies. You cannot pay yourself to do the work in your own house.
5. You can use a limited or streamlined 203(k) for mini-sized projects. Suppose you're just doing your kitchen, bathroom, or another project that costs $35,000 or less. In that case, a streamlined version of the 203(k) is designed just for limited-size projects. 
6. You must spend at least $5,000 on your renovation to use the standard 203(k) program. And the whole mortgage, including those remodeling costs, has to be under the FHA mortgage limit for your area. 
7. You can expect the lender to check how and when the home improvements are done regularly. An inspector will be dispatched to your home multiple times to check the progress, which is why rule #7 is so important.
8. You must start and end your renovation project per the following schedules: 

·          Your contractor has to start work within 30 days of the loan closing. 

·          He can't stop working on the project for over 30 days. 

·          He has to get the whole job done within six months. 

·          Are you doing it yourself? The same timelines apply. So, no long vacations for you until the work gets done.

You can't break these rules, or the lender can take its money back. Like immediately. Your lender can also refuse to advance you any more money or apply any money left in the escrow account to reduce what you owe on the mortgage.