The FHA 203k loan program provides home buyers the opportunity to buy and fix up a property, without exhausting their personal savings. Home buyers can purchase a property and include costs to; make required repairs; make desired updates; fully renovate the property. All repair costs are included in one thirty-year fixed loan. All work starts AFTER purchasing the property, using the money set aside by the bank.
There is no such thing as a FHA 203k approved property. Any single-family home, townhome or even multi-unit (up to four units) property can be financed with FHA 203k loan. This program can be used to convert a one-family dwelling to a two-, three-, or four-family dwelling. An existing multi-unit dwelling can be decreased to a one- to four-family unit, so long as the buyer is buying the property as their primary residence. Condos are also eligible but must be in a FHA-approved complex and be one of no more than four units in the building.
This is an FHA loan, so the guidelines are just as lenient as any other FHA program.
- There are no income limits
- You do not have to be a first-time home buyer,
- 620 Credit Score–possibly lower, as this varies by lender
- Ability to use alternative credit
- Debt-to-income ratios up to 50%
- Cosigners allowed
- Down payment of 3.5%– gift money/down payment assistance allowed for down payment
- Interest rates vary by lender
It’s important to understand there are two types of FHA 203k loans:
1 Full FHA 203k loan –Full 203k Loan is for larger projects requiring more than $35,000 in costs or for projects that require structural repairs. A HUD consultant is required on the Full FHA 203k loan programs.
2 Streamline FHA 203k Loan–The Streamline 203k Loan is for less extensive repairs and improvements. There is no required HUD consultant for the streamline 203K loan. The maximum costs that can be included in the loan are $35,000, none of which can be structural costs.
FHA 203k Streamline: $0 minimum – $35,000 maximum
FHA 203k Standard/Full: $5,000 minimum – no pre-set maximum
Here is an example of how the numbers work to show how much money is needed for a 203K loan.
You want to buy a home at $150,000.
You would like to remodel the kitchen, bathrooms and install hardwood floors, totaling $30,000. (total amount of bids), Purchase Price: $150,000 Total Bids: $30,000 Contingency (15% of bids): $4,500 (this is for anything unforeseen) +Fees: $500 (inspections, title work, loan fees) TOTAL PROJECT COST = $185,000 Client Down Payment = 3.5% * Total Project Cost = $6,475
If the buyer does not have the 3.5% minimum down payment requirement, they can receive the full amount as a gift from a family member or in the form of any city/county/state/federal down payment assistance. The borrower is not required to pay for any cost other than the typical costs associated with the home process (inspection and appraisal). Any money not used is removed from their loan amount once the project is completed.
A contingency reserve is 10%-20% of the repair/renovation amount and its purpose is in-case of any potential cost overruns or unexpected expenses.
When buying a home with a FHA 203k loan, only one appraisal is required, providing the “after improvements have been made” value. The maximum mortgage amount is based on the lesser of
- The as-is value + the cost of rehab work
- 110 % of the after-improved value of the property
The majority of FHA 203k buyers are establishing instant equity where organic appreciation is difficult to obtain in these economic times. Very exciting considering the loan is using government-insured money at an incredibly low interest rate.
The contractors get paid in a series of draws by the borrower’s lender through escrowed funds. At closing, the lender places the rehab/improvement funds into an escrow account.
- FHA 203k Streamline–Contractors receive 2 payments. After closing on the home, contractors may receive up to 50% of the job cost as a pre-construction payment, subject to lender approval and may take weeks to arrive.
- FHA 203k Standard/Full–Contractors receive by default, 4 draws plus a final for payment. If the rehab exceeds $10,000, more draws can be authorized by approval from the borrower and lender before the loan closes. After closing on the home, there is no upfront money paid to contractors to offset the start-up costs.
No. The borrower must be a primary residence owner occupant or a qualified non-profit group. Since 1996, there has been a moratorium on investors using the FHA 203k loan.
Yes, you can refinance your existing mortgage into both versions of the FHA 203k loan. The FHA 203k loan is also available for mortgage refinance transactions for those where the property is owned free-and clear. For the FHA 203k Streamlined Loan, only credit-qualifying “no cash out” refinance transactions with an appraisal is eligible. If the borrower has owned the property for less than a year, the acquisition cost must be used to determine the maximum mortgage amount. The requirement to use the lowest sales price within the last year does not apply to the FHA 203k Streamlined Loan.
10 Steps to the FHA 203k Loan Process