The FHA 203(k) loan program solves a difficult problem for first-time home buyers who need a mortgage and a home renovation loan. When buying a home that needs repairs, banks will not grant a mortgage until repairs are complete. But, until you own the home, repairs cannot be made. The FHA 203(k) program is a loan for home renovation combined with an FHA-insured mortgage. This means you make one application and pay one monthly payment. As soon as your loan closes, the portion of the loan for home renovation is escrowed and distributed to the contractor per a schedule of payments. The minimum amount of an FHA 203(K) loan is $5,000.
There are two types of FHA 203(k) loans they are,
- Streamlined; and
Either loan can be made as part of a first-time buyer’s mortgage or a mortgage refinancing. Always use an experienced FHA lender for your FHA 203(k) loan and FHA-insured mortgage such as Prospect Mortgage.
Both types of loan work the same way at closing. A portion of the loan amount is given to the seller, or to the mortgage holder if a refinancing takes place. The portion of the loan that is for renovation/remodeling/rehabilitation is placed in an escrow account for the contractor to request payments (draws) from.
These renovation/remodeling/rehabilitation loans are popular as they have many of the same features of a basic single family FHA-insured loan. These features include,
- One application
- One monthly payment
- Low down payments
- Low-interest rates as lenders are insured against loss which lowers their risk.
Eligible projects for an FHA 203(k) loan take in,
- Improvements and modernization projects geared to how the home functions.
- Removal of safety and health hazards
- Renovations that make for a better home appearance and/or remove outmodedness
- Structural alterations and reconstruction
- Making energy conservation improvements
- Repair or replace plumbing; digging a well and/or installing a septic system
- Replacement and/or the addition of floor treatments and flooring
- Enhancing accessibility for a disabled person
- Adding or replacing roofing, gutters, and downspouts
- Major landscape work and site improvements
However, some of these remodeling projects fall under either streamlined or standard loans. Let’s take a closer look at both types of loans.
Features of a Streamlined FHA 203(k) Loan
This loan was created to make available an FHA-insured renovation loan that is part of the borrower’s mortgage. Use of the streamlined loan is for projects that are relatively simple and less than $35,000.
Features of this loan consist of the following:
- One application
- One closing
- One monthly payment
- Low down payment
- Competitive mortgage interest rate
- Project is greater than $5,000
- Buyers can purchase and make approved improvements after closing
- Current owners can refinance, stay in their homes, and make approved changes after closing
- Cash down is 3.5 percent of loan
- Own home for at least one-year if refinancing
- Eligible properties – Dwellings 1 to 4 units, condominiums, homes that are manufactured and constructed after 1978
- Any income level may apply
Following is a list of some of the types of projects eligible for 203(k) financing,
- Accessibility improvements for persons with disabilities;
- Repair/Replacement of flooring;
- Painting, both exterior and interior;
- Buying and installing appliances;
- Non-structural improvements relating to home improvements
- Cellar waterproofing
Properties that require the following work items are not eligible for financing under the Streamlined 203 (k),
- Work whose cost is greater than $35,000;
- New construction (including room additions);
- Repairs requiring detailed drawings or architectural exhibits;
- Any repair or improvement requiring a work schedule longer than six (6) months;
- Repair of structural damage; and
- Rehabilitation activities that require more than two (2) payments per specialized contractor.
Fortunately, much of the work deemed ineligible for a streamlined FHA 203(k) loan can be financed with a Standard FHA 203(k) loan. Often, the Standard loan is called a Consultant loan. These loans offer all the features of the 203(k) program but are for more complicated and more expensive projects. Consultant (k) loans include the following types of work,
- New Roof
- Full landscaping
- Structural improvements or repairs
- Projects in excess of $35,000
- Home additions (a new room or adding a second story)
- New siding
- New plumbing