Mortgage and Portfolio Loan Guide

FHA rehab loan

FHA 203K Loan | Everything You Need To Know

With the large number of old properties sold due to the foreclosures and short sales, proper renovation work is necessary to make them suitable for occupying. This has made renovation loans increasingly popular among buyers and owners of old homes. These loans are also great options for current homeowners looking to renovate their homes to accommodate additional family members. Now, there are multiple such renovation loans available for a homebuyer, but none as popular as an FHA 203K loan.

What is an FHA 203K Loan?

These home renovation loans backed by the Federal Housing Administration, or FHA, allow you to borrow adequate money in a single loan to purchase as well as improve the conditions of a used property. These loans offer less risk options for lenders since they are insured by FHA. They also offer incredibly competitive interest rates, allowing borrowers to avoid paying high mortgage payments monthly.

There are so many properties that have ideal locations as well as contain a lot of potential. However, they require a substantial amount of renovation work to make them suitable for families to live in them. Borrowers tend to shy away due to condition and problems of these properties.

However, with an FHA 203k loan, homeowners or buyers can access the required money to renovate these homes, and get them off the market so that they become a part of the community once again.

If you are looking to purchase a property that is in the market due to a foreclosure or Short sale, this rehabilitation loan will provide you enough money to not only purchase the property, but also carry out the necessary renovation work. Foreclosed or used properties tend to need a lot of repair work, and buying one such property without the necessary repairs can be challenging and is sometimes not be suitable for living. 

Self-help is not allowed on FHA 203k loans. All repairs must be completed by a licensed/registered contractor.

Temporary Housing

If you are planning to purchase a home in a new property that is in need of renovation immediately after closing (and is inhabitable), you can use the money from a FHA 203K rehab loan to pay up your mortgage in advance. Moreover, you can utilize this money to pay the rents of the alternate housing arrangements that you have made for your family while the renovation of your property is being completed.

You must ensure that the renovation of the property is completed within six months of the loan being approved. In the meantime, the money would be stored in an escrow account, and will be paid to the contractors in a number of different amounts as new rehab milestones are reached.

FHA Limited 203k loan vs. FHA Standard 203k loan

The limited version of the product is designed for minor repairs not to exceed $35,000 (including contingency).

The standard FHA 203k loan is for major renovation, and projects that can exceed $35,000

Below are is a basic list of allowable renovations for each.

LIMITED FHA 203K Loan | Eligible Repairs and Improvements 

  • Eliminating health and safety hazards per HUD guidelinesFHA rehab loan
  • Connecting to public water and sewage systems
  • Repairing/replacing plumbing, heating, AC, and electrical systems
  • Making changes for improved functions and modernization
  • Eliminating obsolescence
  • Repairing or installing new roofing, provided the structural integrity of the structure will not be impacted by the word being performed; siding, gutters, and downspouts
  • Making energy conservation improvements
  • Creating accessibility for persons with disabilities
  • Installing or repairing fences, walkways, and driveways
  • Installing a new refrigerator, cook-top, oven, dishwasher, built-in microwave, oven, and washer/dryer
  • Repairing or removing an in-ground swimming pool
  • Installing smoke detectors
  • Installing, replacing, or repairing exterior decks, patios, and porches
  • Covering lead-based paint stabilization costs (above and beyond what is paid for by HUD when it sells REO properties) if the structure was built before 1078, in accordance with the Single Family mortgage insurance lead-based paint rule and EPA’s Renovation, Repair, and Painting Rule

Reminder: Maximum 35K in renovations including contingency.

 

STANDARD FHA 203K Loan | Eligible Repairs and Improvements 

  • Converting a one-family structure to a two-family structure
  • Decreasing an existing multi-unit structure to a one- two- family structure
  • Making structural alterations such as the repair or replacement of structural damage, additions to the structure, and finished attics and/or basements
  • Rehabilitating, improving or constructing a garage – can be either attached or detached but must have its own permanent foundation
  • Eliminating health and safety hazards that would violate HUD’s minimum property requirements
  • Installing or repairing wells and/or septic systems203k rehab loan
  • Connecting to public water and sewage systems
  • Repairing/replacing plumbing, heating, AC and electrical systems
  • Making changes for improved functions and modernization
  • Making changes for aesthetic appeal
  • Repairing or adding roofing, gutters and downspouts
  • Making energy conservation improvements
  • Creating accessibility for persons with disabilities
  • Installing or repairing fences, walkways, and driveways
  • Installing new refrigerator, cook-top, oven, dishwasher, built-in microwave, and washer/dryer
  • Repairing or removing an in-ground swimming pool
  • Installing smoke detectors
  • Making site-improvements
  • Landscaping
  • Installing or repairing exterior decks, patios, and porches
  • Constructing a windstorm shelter
  • Covering lead-based paint stabilization costs (above and beyond what is paid for by HUD when it sells REO properties) if the structure was built before 1078, in accordance with the Single Family mortgage insurance lead-based paint rule and EPA’s Renovation, Repair, and Painting Rule

Reminder: Minimum 5K in renovations

Standard FHA 203K loan requires the consultation and applicable reports to be completed by an approved 203k Consultant. Find one near you here.

Ineligible Renovation/Improvements for FHA 203k Loan

This loan is not designed to cater to luxury or recreational improvements.

  • Swimming pools (existing in-ground swimming pools can be repaired)
  • An exterior hot tub, spa, whirlpool bath, bath houses or sauna
  • Barbecue pits, outdoor fireplaces, or hearths
  • Tennis courts
  • Gazebos
  • Photo murals
  • Satellite dishes
  • Tree surgery (except when eliminating an endangerment to existing improvements)
  • Additions or alterations to support commercial use or to equip or refurbish space for commercial use

 

What kinds of properties are eligible for FHA rehab loans?

There are a few types of properties that are eligible for these loans and there are some that do not. For example, investment properties that you purchase to make profits do not qualify when applying for this type of loan.

Eligible

  • 1-2 unit properties
  • Manufactured housing (singlewide, doublewide, and triplewide)
    • The rehab must not impact the structural components of the structure that were designed and constructed in conformance with the FMHCSS and must comply with all other requirements for manufactured homes.
  • FHA approved condominiums and site condos
    • The rehab and improvements are limited to the interior of the unit, except for the installation of firewalls in the attic of the unit
  • HUD REO property
    • The property must be identified as eligible for 203k financing as evidenced on the sales contract or addendum

Ineligible

  • Demolished homes
  • Raised homes
  • Structures relocated to/from another location
  • Mixed-use properties
  • Co-ops
  • Non-FHA approved condos
  • Investment properties
  • Mobile homes
  • 3-4 unit properties

Note: Homes that haven’t been completed are not allowed on the FHA 203k loan; construction of the property must have been completed for at least 1 year. Evidence of completion would be a Certificate of Occupancy or other similar documentation from local municipality.

What is an FHA 203K Construction Consultant?

All standard FHA 203k loans require a 203k consultant.

The role of a 203k consultant is to meet with the borrower and prepare applicable reports for the lender in connection with the property and renovation project.

The consultant will prepare a feasibility study, inspect the property, identify all required architectural exhibits (well/septic certificates, termite reports, etc.), inspect the work for completion and quality of workmanship at each draw request.FHA rehab loan

If there are changes to the original plans the consultant will review the proposed changes to the work write-up and prepare a change of order, if applicable. The 203k consultant will also inform the lender of the progress of the rehabilitation and any problem that arise.

In addition, the 203k consultant’s responsibilities include:

  • Ensuring that the property will comply with HUD’s MPR or HUD’s MPS after the improvements have been completed
  • Provide 203k consultant’s certificate
  • Prepare an unbiased work write-up and cost estimate (without the use of the contractor’s estimate)
    • The work write-up refers to the report prepared by the consultant that identifies each work item to be performed and the specifications for completion of the repair
    • The cost estimate refers to the breakdown of the cost for each proposed work item prepared by the consultant
    • The work item refers to a specific repair or improvement that will be performed

203k consultant fee

Similar to an appraiser, the consultant will charge a fee based on the scope of work.

Fees range from $400 – $1,000 depending on the cost of renovation.

There may be additional charges for things like: feasibility study, draw request fee, change order fee, re-inspection fee, mileage fee when the consultant’s place of business is more than 15 miles from the property.

What contractor can do the repairs on an FHA 203k Loan?

Must be a licensed or registered general contractor – per state or local general contractor laws.

Written agreements between the borrower and the contractor will be completed.

When there are several subcontractors there needs to be one to take the responsibility of being the general contractor for the project. The general contractor will carry over all of the subcontractors’ bids onto their bid. The GC will be responsible for overseeing that all repairs are done in a workmanlike and timely manner.

The general contractor is responsible for disbursing all funds to the subcontractors when funds are released from escrow.

Sufficient insurance to the amount of the total rehabilitation amount through a valid and current general liability insurance policy will be required.

Note: Licensing requirements vary in each state/municipality. If a repair calls for a specialized contractor, such as electrical or plumbing repairs, the contractor must be licensed to do the work.

  • The contractor must provide a detailed bid estimate/bid itemizing all the repairs that are to be completed
  • There can be no identity of interest or conflict of interest between the borrower/builder.
  • Family members are not eligible, nor can the borrower be employed by or be an owner in the contractor’s business.
  • No self-help allowed. Borrower cannot be involved with the work of rehabilitation.

So, how to apply for one such loan?

If you are purchasing or refinancing a home – step one is to get pre-approved by your lender.

The next step involves locating a property that is on sale in the market, and needs renovation work before being deemed suitable for living. These properties are usually available at much cheaper prices than complete houses that are ready to be occupied. Even with the renovation costs, you will find that the eventual expenses are much lesser than new homes.

  • Once you have located the property, you need to have a prelim market analysis completed. This is spelling out the rehab work (to be completed along with the 203k consultant), rough estimated cost of renovation (203K consultant and contractor), and estimated market value of the property upon completion of renovation (realtor).
  • Once the preliminary market analysis is complete, an offer to the seller should be drawn up.  
  • The 203K consultant will work with the borrower on a feasibility study and preliminary cost estimate and is used to complete the Specification of Repairs (SOR). At this point the contractor submits the bid for repairs and loan docs are drawn up.
  • The appraisal order will include the renovation plans so the appraiser will be fully aware of the expected repairs and will complete appraisal subject to completion of plans.
  • Once the loan has been approved by the lender, a closing date will be set by the lending organization. On this date, the seller of the property will receive payment for the sale of the property, and the purchase will be finalized. The remainder of the 203K rehab loan would be reserved for the renovation within an escrow account. This account will be controlled by the lending organization.
  • Once the purchase of the property has been closed, the rehabilitation work of the property will begin. The contractor will carry out the many repairs approved by the lender at the time of the loan application. After completing a certain portion of the renovation work, the contractor will have to submit a list of the completed work. The lender will arrange for proper inspection in order to verify the quality of the work done by the contractor. If the results are satisfactory, a certain amount of money will be paid from the escrow account. Subsequent payments would be made as and when the contractor completes portions of the renovation.
  • Once the renovation work is complete and the property is made suitable for living, the homeowner can move into the house with their family. The contractor will receive the remainder of their payments at the end of the renovation.

There are a lot of critical aspects and details that you must consider properly before applying for a FHA 203K rehab loan. This will not only help you to get your loan application approved, but also ensure that you are able to get the best out of your loan. After all, when this entire ordeal ends, you do not want a property that still has several problems that need to be dealt with. What you want is a beautiful property for your family to call a HOME!

If you have raw land, and looking for a one time close construction loan (to build a home), there is an FHA Construction Loan available too.

Still have Questions?

I invite you to reach out.

I encourage you to reach out to ask the questions that you may still have regarding FHA 203K loans or other loan types.

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