Did you find your dream home only to find out that it doesn’t pass the appraisal? Homebuyers find a home but it’s in less than perfect condition. With mortgage financing, the home must pass the appraisal or there’s no loan.
Enter the FHA 203k loan. These flexible loans provide the funds to buy and renovate a home. We work with a large number of lenders that offer many renovation loan options, helping you get the loan you need.
What is an FHA 203k Loan?
The FHA 203k Loan allows you to turn your fixer-upper into your dream home. If you want to buy a home that is currently in need of repair or if you own a home that is in need of repair, an FHA 203k loan may be right for you.
The section 203k loan allows you to finance the purchase of a home or refinance your existing home plus the cost of the repairs into a single loan.
Since it’s an FHA loan it offers the same lenient credit requirements of a standard FHA Loan.
This loan program can be a good option for first-time homebuyers and those who may want to save money by buying a home that’s a little run down or in need of repairs.
How Does the FHA 203k Loan Work?
The process of buying a home with an FHA 203k loan is like a cross between a normal home purchase and a construction loan.
- The first step is to find a lender who is approved to offer 203k loans.
- Get Pre-Approved
- Find an FHA 203k approved contractor or get your contractor approved with HUD.
- Find your fixer-upper
- Get estimates and written bids for repairs
- Get your loan and bids approved.
- Close on the purchase of the home
- Complete repairs
- Move in
The important thing to know right upfront about FHA 203k loans is that there will be a lot more hoops to jump through than a normal loan.
When you use a 203k loan you’ll not only have all of the normal documentation that you have to provide to the lender.
Determine Your Repairs
Once you’ve selected the home you want to fix up, you’ll need to determine which projects you need to take on.
Since this is an FHA loan you’ll need to address any issues that don’t meet FHA’s property standards.
Examples might include:
- Mold Mitigation
- Broken Windows
- Roof Issues
- Lead-Based Paint
- Missing Handrails
- Exposed Wiring
- Functional HVAC
Once you have a plan for these types of items you can move on to the more cosmetic repairs you want to include.
You’ll have to submit bids and repair estimates, and your contractor will have to complete paperwork in order to be approved to do work on the home.
The homeowner cannot do the work themselves on an FHA 203k loan.
Select a Repair Contractor
Adding the contractor is the central piece that makes getting a 203k loan different than a standard FHA loan.
As noted above you cannot perform any of the work yourself. The contractor you select needs to be licensed and insured. They need to be full-time contractors so using a friend who only takes on projects on the weekend won’t’ fly.
The best results will come from finding a contractor who has done an FHA 203k loan before. The entire project and how smooth it goes depends on the contractor.
It would be wise to put in your contractor agreement that the contractor will complete all 203k paperwork the lender requests.
Get Estimates and Written Bids
You’ll need to provide official written bids in order to move forward with repairs. Those bids will be provided to the lender who will then provide them to the appraiser.
The appraiser will take those bids and build their estimated value off of them. Any bid changes during the process can incur additonal costs and fees. If the work changes enough it could also require your loan to be re-approved.
Close the Loan
Once you have your bids, appraisal, and lender requirements in place, the lender will approve the loan and schedule the closing.
At the closing, you will purchase the property and up to 50% of the repair process will be distributed to you and the contractor or to each contractor if you’re using multiple.
Start the Work
Unlike purchasing a home that doesn’t need repair, you won’t be moving in just yet. The contractor will begin performing the work to turn your fixer-upper into your dream home.
FHA 203k Loan Requirements
The FHA 203k is a sub loan for the FHA loan program which offers easier requirements to promote homeownership. Getting an FHA 203k is much easier than a typical renovation loan.
What credit score is required for FHA 203k Loan?
FHA’s minimum credit score requirement for it’s 3.5% down payment requirements is 580. However, on the FHA 203k loan, many lenders will require a credit score between 620 and 640 in order to qualify.
FHA allows for much lower credit scores than conventional and other renovation laons.
What’s down payment is required on a 203k loan?
FHA requires a 3.5% down payment in order to qualify for the loan. This down payment is based on your purchase price + repair costs.
A $250,000 home with $20,0000 in repairs would be $270,000
$270,000 x 3.5% = $9450.00
FHA is fairly flexible about where your down payment can come from, including borrowing from retirement accounts or getting a gift from family members.
Max Loan Amount for FHA 203k Loan
Many buyers want to know the maximum amount they can borrow when it comes to a 203k loan.
The max amount you can borrow is determined by a few different factors:
- Your Debt-to-Income Ratio
- Your Down Payment
- FHA Loan Limits
- Property’s Value
Let’s assume you have a debt-to-income ratio under 50% and enough money saved to cover your down payment and closing costs.
The next thing you’ll need to understand is FHA’s Loan Limits.
- Single Unit: $420,680
- Two Unit: $538,650
- Three Unit: $651,050
- Four Unit: $809,150
If you know you’ll be borrowing less than FHA’s loan limits next you’ll need to consider the property’s value.
FHA will allow you to borrow up to 110% of the property’s proposed repaired value, or the price of the home plus repair costs, which is less.
Can I use a 203k loan on an investment property?
FHA loans only work for the borrower’s primary residence. If you want to use any FHA loan program it must be for your own residence. Typcially FHA requires you to reside in the home for at least 12 months.
What can I use my FHA 203k for?
In order to answer this question, you first need to understand the two different types of FHA 203k loans. The Limited FHA 203k is for smaller lower costs repairs and the Full FHA 203k loan is for major renovations.
Limited FHA 203k
The Limited FHA 203k loan is intended for smaller projects that aren’t structural in nature. If you want to remodel a kitchen or a bathroom, change out the floors, or put in an outdoor patio, the Limited 203k might be the loan for you.
Limited 203k Requirements:
- Rehab costs can’t exceed $35,000
- Only One General Contractor Can Be Used
- Work Must Begin Within 30 Days
- Work Must Be Completed Within 6 Months
- 620 Minium Credit Score for Most Lenders
Allowed Repairs for Limited 203k:
The FHA Streamline loan doesn’t allow for any structural repairs. A sampling of the allowed repairs includes:
- A roofing repair or replacement
- Window or door repair or replacement
- Repair or replacement of HVAC, electrical and plumbing systems
- Repair or replacement of flooring
- Accessibility improvements
- Adding decks or porches
- Basement remodel (nothing structural)
Unacceptable 203k Repairs:
- Structural modifications
- Repair,removal or remediation of oil tanks
- Repair or installation of private water systems (wells)
- Repair or installation of private waste management systems (septics systems, cesspools, pits etc)
- Mold remediation
Standard FHA 203k Loan
The standard FHA 203k loan is designed for full scale remodels, large scale projects and structural modifications.
If your looking to completely transform a home, make foundations repairs or add an addition the Standard 203k loan is right for you.
Standard 203k Loan Requirements:
- Total renovation costs must be at least $5,000
- Must use a 203(k) consultant
- 1 or 2 Unit Homes, Manufactured Homes, Approved Condos
- Primary residence only
Allowed Repairs for Standard 203k
The FHA 203K loan allows many repairs, including structural repairs. A sampling of what you can do with it includes:
- Structural repairs/renovations
- Room additions
- Accessibility renovations
- Remodeling bathrooms or kitchens
- Repairing or replacing roofing
- Repairing or replacing flooring
- Adding garage or carport
- Upgrading or repairing plumbing or electrical systems
- Fixing health hazards
- Adding a porch or patio
- Knocking down or adding walls
- Installing energy-efficient equipment
Repairs Not Allowed with Standard FHA 203k Loans
- Luxury items like swimming pools, outdoor kitchens, hot tubs, or tennis courts
- Improvements for business purposes
- Improvements that aren’t permanently attached to the property
Should I Consider an FHA 203k Loan?
By now you’re probably wondering whether the 203k loan is right for you. Let’s discuss some pros and cons of using a 203k loan.
Pros of FHA 203k Loan
- Buying and rehabbing a home can build equity fast
- Homes in need of repair are often cheaper than ones that don’t
- Low down payment requirement
- Flexible credit requirements
Cons of FHA 203k Loan
- A lot of paperwork to get started
- 1.75% Mortgage Insurance Fee
- Only for primary residences
- Do it yourself work not allowed
Home Renovation Alternatives
Home Equity Loans: A home equity loan is a second mortgage you place on your home that allows you to get cash to do whatever you need.
Equity loans can come with a higher interest rate, but will provide a simpler easier process for those who already own their home and have equity.
HELOC: The home equity line of credit, like the home equity loan, allows you to tap into your homes equity to use the funds as you need.
HELOC’s have a variable interest rate and a revolving credit limit. So as you pay it down more becomes available. The down side is that the payment is usually not fixed and will fluctuate.
Fannie Mae HomeStyle mortgage: The homestyle loan is a conventional renovation loan that also allows you to buy a new home and perform repairs. It doesn’t have the higher upfront mortgage insurance that FHA has.
HomeStyle does require 5% down and usually has much stricter credit requirements in order to qualify.
Cash Out Refinance: If you already own your home and have equity, a cash-out refinance is also an option.
This will allow you to tap into the equity in your home, still get a low fixed rate, and use the cash for whatever you need to do.