Everything You Need To Know About The FHA 203(k) Loan


How To Rehab Your Home With Your Mortgage Insurance

The idea of taking on a fixer upper might seem like a nightmare to some people—what with the work, time, money, and stress that can go into it. But, there are others out there who would be eager and determined to take on the challenge of transforming an old, lackluster house into the home of their dreams. Unfortunately, even if you can afford the rehab costs, getting approved for a loan can be difficult. Why? Because most lenders aren’t willing to risk taking on neglected, “uninhabitable” properties. Luckily, the Federal Housing Administration (FHA) has rectified the problem by introducing the 203(k) mortgage program to help buyers who want to purchase and rehab run-down houses, or homeowners wanting to refinance and renovate their current home. If you’re interested in taking advantage of the FHA 203(k) loan, here is a short guide with all the facts you need to know. SEE ALSO: FHA Attempting To Aid Distressed Homeowners

What Is A FHA 203(k) Loan?

For buyers, the FHA 203(k) loan covers the acquisition of the home as well as the associated repairs and upgrades. For homeowners, a portion of the loan is used to pay off the existing mortgage, and the remaining funds are used to cover the rehabilitation expenses. Also, since the program is backed by the federal government, the loan is insured. This minimizes the lender’s risk, offering security in case the borrower defaults on the loan. However, the loan amount cannot exceed the FHA mortgage limit for the area. This is determined from either the value of the home before the rehab plus the cost of rehab, or 110 percent of the appraised value of the home after the work is done, whichever value is less. The rehabilitation cost must also be at least $5,000 to be approved. This cost includes:

• materials • labor • permits • inspection • architectural and engineering fees • a small reserve for unexpected expenses

Additionally, borrowers can request up to six months of mortgage payments to offset the cost of living if they cannot live in the home while renovations are taking place.

Types Of Loans Available

The FHA offers three different types of 203(k) loan programs. The primary 203(k) mortgage is for the rehab and repair of any single family dwelling, as long as the rehabilitation costs exceed $5,000. The Streamlined 203(k) is an option for less extensive projects, only financing about $35,000 for mortgage, improvements and repairs. This is ideal for homeowners who want to make upgrades and repairs to their home before they sell, or buyers wanting to update the kitchen or baths before moving in. The PowerSaver Pilot 203(k) is a new program for homeowners who need financing when making low-cost, energy saving upgrades to their home renovation project. These improvements must be approved by the lender, and the minimum cost of upgrades must be at least $3,500. However, this program is set to expire May 4, 2015.

What It Covers

According to the guidelines set forth by the U.S. Department of Housing and Urban Development, the following improvements are acceptable under the 203(k) program:

• alterations and reconstruction to the structure of the home • up to date improvements to the home’s function • elimination of health and safety hazards • curb appeal • updating or replacing the plumbing • installing a well or septic system • adding or replacing roofing, gutter, and downspouts • adding or replacing floors or floor treatments • landscaping and site improvements • enhancing accessibility for a disabled person • energy-conservation improvements

These improvements must also adhere to basic energy efficiency, structural guidelines, and local codes.

How To Apply

One drawback to a 203(k) loan, is the application process, which can be complicated and requires a lot of preparation and work. In order to apply for the loan you need to get an FHA approved lender. To get a lender, you first need to create a detailed proposal of your project, with cost estimates for each repair or upgrade you intend to make. Also include the cost of labor, even if you plan to do the work yourself. This is needed in case something happens and you end up hiring someone after all. You also need to get the home appraised to determine the loan amount. If you are too overwhelmed by all the paperwork and procedures, consider hiring a specialist, whose fee can be included in the mortgage. SEE ALSO: Home Purchase Loans: What’s The Difference? Although the process may be daunting, creating the house of your dreams to your very own specifications might just be worth it. The 203(k) mortgage is a great option for those willing to roll up their sleeves and restore a rundown home. For questions and concerns about this or any of FHA’s programs, contact an FHA-approved lender for assistance.  
Date of original publication:
Updated on: November 10, 2015

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