What is an FHA 203(k) Loan?
FHA 203(k) loans allow home buyers to purchase properties and include costs for home improvement for as little as 3.5% down. They also allow homeowners to refinance existing properties and include costs for home improvement.
There are two types of FHA 203(k) loans:
FHA 203(k) Standard loans are designed for major remodeling and renovation projects. There is a minimum repair cost of $5,000 and the use of a 203(k) Consultant is required.
FHA 203(k) Limited loans are designed for minor remodeling and renovation projects. Structural repairs are not allowed. No minimum repair cost is required, but total renovation costs, fees, and reserves may not exceed $75,000.
What properties are eligible for FHA 203(k) Loans?
Eligible properties include:
- 1-4 units, owner-occupied
- Single-family residences with an Accessory Dwelling Unit (ADU)
- Historical Properties (require approval for repairs from governing historical society)
- HUD REOs
- Manufactured homes (non-structural improvements only)
- Mixed-Use properties
- Modular homes
- Planned Unit Developments (“PUD”)
- Townhomes
- Warrantable Condos
What improvements are allowed with FHA 203(k) Loans?
You can choose which repairs you would like to finance, but it is important to note that all appraiser-noted deficiencies and repairs must be addressed.
Eligible Improvements
- Converting a one-family home to a two-, three- or four-family property
- Decreasing an existing multi-unit property to a one- to four-family property
- Reconstructing a home that has been or will be demolished, provided the complete existing foundation system is not affected and will still be used
- Repairing, reconstructing or elevating an existing foundation where the home will not be demolished
- Purchasing an existing home on another site, moving it onto a new foundation and repairing/renovating it
- Making structural alterations such as the repair or replacement of structural damage, additions to the home, and finished attics and/or basements
- Rehabilitating, improving or constructing a garage
- Eliminating health and safety hazards that would violate HUD’s Minimum Property Requirements (MPRs)
- Installing or repairing wells and/or septic systems
- Connecting to public water and sewage systems
- Repairing/replacing plumbing, heating, AC and electrical systems
- Making changes for improved functions and modernization
- Making changes for aesthetic appeal
- Repairing or adding roofing, gutters and downspouts
- Making energy conservation improvements
- Creating accessibility for persons with disabilities
- Installing or repairing fences, walkways, and driveways
- Installing a new refrigerator, cooktop, oven, dishwasher, built-in microwave oven, and washer/dryer
- Repairing or removing an in-ground swimming pool
- Installing smoke detectors
- Making site improvements
- Landscaping
- Installing or repairing exterior decks, patios, and porches
- Constructing a windstorm shelter
- Covering lead-based paint stabilization costs if the home was built before 1978
Ineligible Improvements
- New construction from the ground up
- Any work performed or materials purchased prior to closing
- Recreational or luxury improvements are not allowed, such as: installation of new swimming pools (existing swimming pools can be repaired), an exterior hot tub, spa, whirlpool bath, or sauna, barbecue pits, outdoor fireplaces or hearths, bath houses, tennis courts, satellite dishes, tree surgery (except when eliminating an endangerment to existing improvements), photo murals, gazebos
- Making additions or alterations to support commercial use or to equip or refurbish space for commercial use is not allowed
- Repair or improvements that are expected to require more than six months to complete are not allowed
- Improvements or changes made to the initial scope of work as identified in the 203(k)Consultant’s WWU and/or contractor’s bid that were not pre-approved by Diamond Residential Mortgage Corporation in advance may not be eligible for reimbursement
What are the FHA 203(k) Loan Appraisal Requirements?
As-Is Appraisal:
As-is appraisals may or may not be required for FHA 203(k) loans.When purchasing a home being financed by an FHA 203(k) loan, an as-is appraisal is only required when the seller has not owned the property for very long and an as-is appraisal report is needed to comply with HUD’s Property Flipping guidelines.
An as-is appraisal is required on some refinances such as when financing more than the after-improved value of a home or when a property has been owned for less than twelve (12) months. If a property has been inherited or given as a gift, the requirement for an as-is appraisal is waived. However, obtaining an as-is appraisal oftentimes allows you to borrow more and reduces or eliminates any cash needed to close when refinancing, so it may be a good idea to have an as-is appraisal done even if one is not technically required.
After-Improved Appraisal:
An after-improved appraisal is required for every FHA 203(k) loan.
What are the FHA 203(k) Loan Financeable Renovation Costs?
- A contingency reserve will be funded to cover unforeseen repairs that are discovered during renovation. The amount of contingency will vary between 10%-20% of the bid amount. Contingency reserves are required and typically financed in the loan amount (i.e., Financed Contingency). Alternatively, you may bring funds to closing to fund the contingency reserves; however, any assets required to fund the contingency reserves must be documented and verified above the amount required for down payment and reserves (i.e., Borrower-Funded Contingency)
- Hard costs (i.e., labor and materials from the contractor’s bid)
- Architectural fees (FHA 203(k) Standard only)
- Engineering fees (FHA 203(k) Standard only)
- Consultant fees
- Draw inspection fees
- Title update fees
- Permit costs
- Feasibility Study (Diamond Residential Mortgage Corporation will not require this)
- Mortgage Payment Reserves (FHA 203(k) Standard only) not to exceed twelve (12) months’ principal, interest, property taxes, and homeowner’s insurance payments, depending on the length of time the property will be uninhabitable during renovation
- Financeable Origination Fee
Other Highlights of FHA 203(k) Loans
You can use up to 110% of the property’s after-improved value to structure your loan
An Up-Front Mortgage Insurance Premium (“UFMIP”) will be financed into your loan. In addition, a monthly mortgage insurance premium will be included in your monthly payment
Your contractor’s credentials will be vetted. Any contractor hired will have to provide proof of licensing (if required), a Certificate of Liability Insurance, Worker’s Compensation (if required), any specialty certifications required (e.g., lead-based paint, mold, radon, asbestos), and a signed IRS W-9 Form
Your contractor’s bid has to meet certain requirements such as being on contractor letterhead, naming you as the client, identifying the property where the work will take place, a full description and the location of all work being performed, a labor and materials breakdown per line item, permits and their associated costs, accurate tally of all sub-totals and the grand total, start and completion dates, and number of draws needed. If the property will be uninhabitable during renovation, the contractor should indicate so and let us know how long the property will be uninhabitable. For FHA 203(k) Limited loans, the contractor must specifically state all repairs being performed are non-structural in nature
You may not be related to or have a business relationship with the contractor or any other party in the transaction. There is only one exception: you may be related to the seller
No other parties in the transaction may be related to one another or have a business relationship with one another
You may be able to perform some of the work yourself. To find out whether or not you would be allowed to perform work, contact me
Gifts are allowed on purchases and some down-payment assistance programs are allowed as well
FHA 203(k) loans may be combined with the $100 Down HUD REO program, Good Neighbor Next Door program, Energy Efficient Mortgage (“EEM”), 203(h) for Disaster Victims, Solar and Wind Technologies, and some down payment assistance programs
All permits should be pulled immediately after loan closing, work should commence within thirty (30) days’ of loan closing, and work should not cease for any thirty (30) day period. Work must be completed within nine (9) months of loan closing for Limited 203(k) loans or twelve (12) months of closing for Standard 203(k) loans
Draw Process for FHA 203(k) Loans
Below is a list of items that may be disbursed at loan closing:
FHA 203(k) Standard
- Permit costs (permits must be obtained before work commences)
- Prepaid architectural or engineering fees
- Prepaid Consultant fees
- Origination fees
- Discount points
- Materials costs for items, prepaid by the Borrower in cash or by the contractor, where a contract is established with the supplier and an order is placed with the manufacturer for delivery at a later date; and/or
- Up to 50 percent of materials costs for items, not yet paid for by the Borrower or contractor, where a contract is established with the supplier and an order is placed with the manufacturer for delivery at a later date
FHA 203(k) Limited
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Permit fees (permits obtained before work commences)
-
Prepaid Consultant fees
-
Origination fees
-
Discount points
-
Up to 50 percent of the estimated materials and labor costs before beginning construction only when the contractor is not willing or able to defer receipt of payment until completion of the work, or the payment represents the cost of materials incurred prior to construction. A statement from the contractor is sufficient to document
The remaining draw process for each loan program is as follows:
FHA 203(k) Standard
-
Up to 5 draws are allowed
-
A 10% percent holdback is required for each progress draw; the total of all holdbacks will be released in the final draw
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The 203(k) Consultant will perform an inspection prior to every draw, including the final inspection, and prepare Draw Request Form HUD-9746-A
FHA 203(k) Limited
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Remaining 50% of bid amount will be released after all work has been completed
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Final inspection will be performed by the original appraiser or an eligible 203(k)Consultant
There are many different types of renovation loans: conventional renovation loans through Fannie Mae® (“FNMA”) and Freddie Mac® (“FHLMC”), FHA renovation loans, USDA renovation loans, a VA renovation loan option, and portfolio renovation loans.
Below is a high-level overview of the renovation loans Diamond Residential Mortgage Corporation offers. For more information, explore FAQs and Blog.
Keys To Success:
- Inquire early! If you attempt to place an offer on a property that is listed for sale without a pre-qualification letter, your offer may be rejected and you may miss a window of opportunity. It is best to secure financing before you are too far into the buying process.
- Make sure your contractor is on board with the contractor qualifications, bid requirements, and draw process required for your loan type.
- If a Consultant is involved, meet together at the property with the contractor, so all parties can finalize the scope of work together.
- Provide requested paperwork quickly to meet contract deadlines. Time lost on the front end of a deal oftentimes cannot be made up on the back end of the deal to hit closing deadlines.
- Be decisive! Decide on the details of your renovation project early and resist the temptation to make changes throughout the loan process. Wavering during the process can cause delays with your closing. Feel confident in pushing forward with the decisions you make at the onset of the transaction. That’s not to say you can’t make changes along the way, but making those changes mid-stream will likely cause delays.
