Is an FHA 203(k) Loan Right For Me?
If you plan to purchase a fixer-upper or need to make improvements to your existing home, an FHA 203(k) loan may be the perfect rehab loan for you. Combining the renovation costs with your home mortgage with an FHA 203(k) loan gives you one loan with one payment for both your mortgage and renovation.
In addition to a low down payment of 3.5%, the eligibility terms of an FHA 203(k) loan are more flexible. Other general eligibility and loan features include:
- Have at least a 620 FICO.
- Do not need to be a first-time homebuyer in order to be eligible.
- If your renovation is extensive and you cannot live in the home during construction, you may be able to finance up to six months of mortgage payments during renovations if the home is deemed uninhabitable by the HUD Consultant.
- Maximum loan amount under a 203(k) purchase loan, is 96.5% of the after-improved value¹. For refinancing, the maximum loan amount is 97.75 percent of the after-improved value.² To check the current loan limits by county, visit http://entp.hud.gov
Although some restrictions and special rules apply, 203(k) loans can be used to purchase and refurbish condos³, two-to-four unit properties⁴, and mixed-use properties, in addition to single-family residences and homes in planned unit developments.
How Does the 203(k) Loan Work?
While the requirements for the borrower for regular FHA loans and 203(k) loans are the same, the appraisal process is different.
- Two values are assigned to the property – an as-is value, and an after-improvement value that takes into account the planned repairs.
- Your final loan amount is derived from the after-improvement value.
- The property then closes escrow in as-is condition with no money up front.
- At this point, the lender typically has a list of planned repairs for the property.
- The renovation funds are then given in phases and draws – or predetermined, scheduled amounts based on construction progress. In other words, the builder requests draws for each phase of new home construction.
The renovation Mortgage Loan Originators at HomeBridge are committed to providing personalized service to you. From helping you understand the difference between a home construction loan and home improvement loan to answering your questions, we can explain the program and how it can fit your needs.
FHA 203(k) Mortgage Loan Limits and Options
There are actually two types of 203(k) loans: the Limited K and the “Standard” Consultant K.
The Limited 203(k) loan was specifically created for homes that do not have structural or foundational problems.
- If your home can be remodeled, repaired, or updated for less than $35,000, the Limited K may be right for you.
- Minor home improvements are covered:
- No structural or luxury improvements.
- Repairs must start within 30 days of your loan closing, and must be finished within six months.
The Consultant K – This loan is for homes needing structural repairs or will require work in excess of $35,000.
- Bigger projects like room additions and extensive renovations
- Minimum loan amount of $5,000. Maximum loan amount is based on the home’s after-improved value.¹ & ²
- If you choose the Consultant K loan, your mortgage lender will require you to work with a HUD-approved 203(k) consultant who will inspect and evaluate your renovation.
- For more differences between the two, please visit our FHA Limited 203(k) vs. “Standard 203(k)” Consultant K loan page.
Finally, it’s important to understand which projects qualify for 203(k) financing. First, if the property isn’t your primary place of residence, you won’t qualify. Here are some of the many home improvements that you can finance with a 203 (k) loan:
As far as projects go,
- Room additions
- Kitchen and bathroom upgrades or renovation
- Energy efficient upgrades
- Plumbing and electrical upgrades
- Weather stripping and insulation upgrades
- Disability improvement
- Basement completion and waterproofing
- Landscape improvements
- Removal of lead-based paint
- New roofing, flooring, windows and doors
The above content is for general informational purposes only. For a complete list of qualifying improvements, please speak with a Homebridge Mortgage Loan Originator.
¹For FHA 203(k) purchase transactions the maximum loan amount is the lesser of the sales price + renovation costs or 110% of the after improved value, times the maximum loan-to-value.
² For refinance transactions the maximum loan amount is the lesser of the property value before renovation + renovation costs or 110% of the after improved value, times the maximum loan-to-value. Loan amount must be within FHA county loan limits.
³ Only interior work is allowed for condos and the maximum loan amount is based on 100% of the after improved value.
⁴ Mixed used properties are allowed providing all square footage guidelines are met.