FHA 203K Loan: Renovation Mortgage Loans Explained

Many homebuyers in my area have asked about buying a "fixer-upper" or a "handyman's special, but some lack the funds for a down payment and the funds to rehab the property. If you need money to repair or update an older house (or 1-4 unit multi family property) the FHA 203K mortgage could be perfect for you. The following article will discuss what an FHA 203k Mortgage is, how an FHA 203k mortgage works (and differs from a traditional mortgage), plus connect you with some of the top 203k Motgage lenders in the country.

APPLY HERE: 203k Mortgage Application

What is the FHA 203k loan?

A 203K loan is a form of FHA loan which allows you to finance a house purchase as well as provide additional funds for repairing and/or remodeling the house. It's the ideal option for purchasing, making, or repairing an existing property. Since 203k loans can be financed through FHA, they are generally cheaper and offer more flexible credit requirements than other mortgage loan options.

FHA 203(k) Loans: How does it Work?

203(k) loans are essentially a home purchase or renovation mortgage that provides funds to acquire the property and funds to rehab or renovate the property.

What types of Homes are Eligible for 203 (K) Mortgage?

• A 1-4 unit home that has been completed for at least one year
• Condominiums in 1-4 units (interior only)
• Single Family Homes

FHA 203k Eligible Activities:

The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. Section 203(k) insured loans can finance the rehabilitation of the residential portion of a property that also has non-residential uses; they can also cover the conversion of a property of any size to a one- to four- unit structure. The types of improvements that borrowers may make using Section 203(k) financing include:

• structural alterations and reconstruction
• modernization and improvements to the home's function
• elimination of health and safety hazards
• changes that improve appearance and eliminate obsolescence
• reconditioning or replacing plumbing; installing a well and/or septic system
• adding or replacing roofing, gutters, and downspouts
• adding or replacing floors and/or floor treatments
• major landscape work and site improvements
• enhancing accessibility for a disabled person
• making energy conservation improvements

FHA 203K Type of Assistance:

Section 203(k) insures mortgages covering the purchase or refinancing and rehabilitation of a home that is at least a year old. A portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.

Many of the rules and restrictions that make FHA's basic single family mortgage insurance product (Section 203(b)) relatively convenient for lower income borrowers apply here. But lenders may charge some additional fees, such as a supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehabilitation plan, and a higher appraisal fee.

New FHA 203k Mortgage Limits for 2023

• One Unit $472,030
• Two Unit $604,400
• Three Unit $730,525
• Four Unit $907,900

Pros and Cons of FHA 203k Mortgage

On the positive side, a 203K Loan allows you to purchase affordable properties you might not have considered before acquiring. The house can be customized as per your own requirements, and after the repair has been done you will have equity in the house immediately. Another major advantage is that there's a deduction for interest on redevelopment costs. Since interest on some of these products is not deductible, it offers significant savings for the borrower or the consumer. It does have disadvantages. The first 203 k loan requires mortgage insurance. This means extra upfront fees and heftier monthly expenses over the long term.

How the FHA 203k Program Can Be Used?

• To purchase a dwelling and the land and rehabilitate it;

• To purchase a stick built home on one site, move it onto a new foundation, and rehabilitate it;

• To refinance existing liens secured against the subject property and rehabilitate; or

• To prepare a property to be placed on the market.

Benefits of the 203(k) Program

• Buyers can purchase and make approved improvements after closing;

• Current owners can refinance, stay in their homes, and make approved improvements after closing;

• Increases property value and builds equity; and

• Combines the cost of the home and the renovation into one mortgage.

Eligible Supplemental Programs and Products for 203k Mortgage

A 203(k) Mortgage may be used in conjunction with the following Section 203(h)

• Mortgage Insurance for Disaster Victims;
• Energy Efficient Mortgages; or
• Solar and Wind Technologies.

Basic Eligibility

• Must meet standard FHA 203(b) credit qualifications; •
• Must meet standard FHA 203(b) down payment requirements;
• Must pay Up-front and Annual Mortgage Insurance Premiums as with most 203(b) mortgages; and
• Property does not have to meet Minimum Property Standards at closing.

FHA’s Office of Single Family Housing Training Module 203(k) Programs for Two Different Renovation Project Needs There are two types of 203(k) Rehabilitation Mortgages as described below

• Limited 203(k) [formerly known as the Streamlined (k)].
• The Standrd 203K

• The Standard 203(k)

• The Standard 203(k) mortgage is used for major renovation and repairs.
• There is a minimum repair cost of $5,000 and the use of a 203(k)
• Consultant is required.

• The Limited 203(k)

• The Limited 203(k) mortgage may only be used for minor remodeling and non-structural repairs.
• The Limited 203(k) mortgage does not require the use of a 203(k) Consultant, but a Consultant may be used.
• The total rehabilitation cost must not exceed $35,000. There is no minimum rehabilitation cost.