The 203k loan program helps homebuyers and homeowners by allowing them to finance both the cost of purchasing (or refinancing) a property plus the cost of renovating it. Part of the loan is used to pay the seller (or pay off the existing mortgage, if refinancing) and the remaining funds are placed in an escrow account and released as rehabilitation is completed.
203(k) limited loan: Provides up to $35,000 for renovations, but major structural repairs aren’t eligible.
203(k) standard loan: Renovations must cost at least $5,000, and major structural repairs are eligible. Borrowers using a 203(k) standard loan must hire a HUD consultant to oversee the renovation process.
Types of Improvements that 203k Financing Covers:
- Structural alterations and reconstruction
- Modernize and improvee a home's function
- Eliminate health and safety hazards
- Improve appearance and eliminate obsolescence
- Recondition or replace plumbing; installing a well and/or septic system
- Add or replace roofing, gutters, and downspouts
- Add or replace floors and/or floor treatments
- Major landscape work and site improvements
- Enhance accessibility for a disabled person
- Make a home energy-efficient
Improvements usually must be completed by an FHA approved licensed contractor. In some cases, the contractor must also be approved by a HUD consultant.
203K Loan Pros:
- Down payment: 3.5% down payment (If your credit score is below 580, you might have to put 10% down).
- Credit score: You’ll need a credit score of at least 500 to qualify for an FHA 203(k) loan, though some lenders require a 640 credit score.
- Repairs: The FHA 203K rehab loan provides homebuyers with an incentive to purchase old properties, or properties in need of repairs. A limited loan provides up to $35,000 for cosmetic repairs, while a standard loan funds more serious renovations. Borrowers are eligible to receive up to 110 percent of the after repair value of the property.
- Borrow 6 months’ worth for mortgage payments: A portion of the loan will be used to pay the seller, while the remainder are put into an escrow account. These funds are released to pay the mortgage during the rehabilitation timeline. This helps ease pressure off the homeowner during the time that they cannot inhabit the property.
- Choose between adjustable or fixed-rate mortgages: The loan provides lenders and borrowers with the option to choose between a single, long term, fixed or adjustable rate loan.
203K Loan Cons:
- Licensed contractor required: 203K borrowers are required to hire a licensed contractor, A construction consultant is required for a standard loan. Do-it-yourself (DIY) repairs are not allowed.
- Investment properties not eligible: Investment properties are not eligible. However, 1-4 unit homes, 1-4 building condos and conversions are eligible, making an owner-occupied strategy possible.
- Mortgage insurance required: Like other loans where the down payment is less than 20 percent, the 203K loan requires a mortgage insurance. The premium is typically 0.85 percent of the loan. This rate will change based on the down payment and loan amounts.
- Higher interest rates: 203K loan rates can be up to 1 percentage point higher when compared to other types of mortgage products.
- Extended closing times: The closing process can take up to 6 months, which is longer than a traditional closing timeline.
203k Loan Requirements:
- 203K lenders must be approved by the FHA
- Good employment history
- Proof of income
- No delinquencies in the past 12 months
- No bankruptcy or foreclosure in last 3 years
- Two years worth of tax returns
- Minimum 3.5 percent down payment
Eligible Property Types:
- Single family property
- Multifamily homes of 4 units or less
- Condominiums between 1 and 4 buildings
- Off-site modular units that can be moved to a property
- A single unit that can be converted to 2 to 4 units
- Demolished or torn down property where at least some of the foundation is remaining
How to Apply:
Applications must be submitted through an FHA-approved lender.
Sources:
https://www.hud.gov/program_offices/housing/sfh/203k/203k--df
https://www.nerdwallet.com/article/mortgages/fha-203k-renovation-loan
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