In July, HUD announced several changes to its FHA 203(k) Rehabilitation Program, which take effect on November 4, 2024. These adjustments are meant to address longstanding issues in renovation financing, yet, in my view, they fall short, primarily favoring 203(k) Consultants over the needs of homeowners and buyers.
Here’s a breakdown of the most important changes and how they impact homeowners, buyers, and lenders.
Overview of FHA 203(k) Loan Types
There are two primary types of FHA 203(k) loans, each catering to different renovation needs:
- FHA 203(k) Standard: Used for extensive renovations, including structural repairs. Requires a minimum of $5,000 in financed renovation costs and mandates the use of a 203(k) Consultant.
- FHA 203(k) Limited: Designed for minor, non-structural updates without a minimum renovation cost requirement. Consultant use is optional, which can save homeowners time and money.
Both loans allow homeowners and buyers to finance the costs of repairs and updates, but with different scopes and requirements.
Key Program Changes
Increased Financing Cap on Limited 203(k) Loans
The maximum allowable renovation costs for Limited 203(k) loans have increased from $35,000 to $75,000. This is a welcome change, as it enables larger projects without requiring a 203(k) Consultant. Note that this $75,000 cap includes all renovation-related costs, such as permits and inspection fees—not just contractor costs.
Extended Project Timelines
The program now provides longer timelines to accommodate delays in permitting, material delivery, and labor shortages:
- Standard 203(k) loans: Extended from 6 months to 12 months for completion.
- Limited 203(k) loans: Extended from 6 months to 9 months.
Additionally, Standard 203(k) loans can now include up to 12 months of mortgage payments to cover housing costs if the property is uninhabitable during renovations. Limited loans now allow buyers a 30-day grace period to move in after closing, up from the previous 15 days.
Increased 203(k) Consultant Fees: A Drawback for Buyers
One of the most controversial changes is the significant fee increase for 203(k) Consultants. Given the limited availability of these Consultants and rising housing costs, this fee increase creates new financial burdens for homeowners and buyers.
While HUD’s aim may have been to attract more Consultants by increasing fees, it restricts the use of underperforming consultants, further limiting options for quality services. Rather than raising costs, HUD could consider a more practical approach, like training and mentoring new Consultants and allowing the market to determine usual and customary fees for their services.
Below is a summary of the fee changes:
| Service | Previous Fee | New Fee |
| Feasibility Study | $100 | $375 |
| Work Write-Up | $400-$1,000 based on repair costs | $1,000-$2,000 based on repair costs |
| Draw Inspection | Up to $350 | Up to $375 |
| Change Order | $100 | $120 |
| Reinspection | $50 | $225 |
Although these fees can be financed, the increase may deter homeowners and buyers from using Consultants on FHA 203(k) Limited loans, where consultants are optional.
Recommendations for HUD: Improving Affordability and Access
If HUD truly intends to improve renovation loan accessibility, here are a few suggestions they might consider:
- Remove the 203(k) Consultant Requirement: Make Consultants optional and allow market competition to determine fair fees.
- Enhance Consultant Training: Develop a standardized training and mentoring program for Consultants to ensure consistent quality.
- Remove the Requirement for “As-Is” Appraisals: This could make the loans more accessible and affordable.
- Ease Restrictions on Contractor Bids: Allow flexibility in bid submissions, as some contractors struggle with strict bid breakdowns, particularly for labor and materials.
- Permit Initial Contractor Deposits: Allow upfront payments on FHA 203(k) Standard loans, which could incentivize more contractors to work with 203(k) projects.
These changes would reduce costs for FHA 203(k) loans and pave the way for more contractors to work with the program, ultimately helping more homeowners and buyers access FHA renovation loans.
Other Financing Options
The changes to the FHA 203(k) program bring both opportunities and challenges for homeowners and home buyers looking to finance the costs of home improvements.
For projects exceeding the $75,000 cap on FHA 203(k) Limited loans, homeowners and buyers may want to explore other, less expensive financing options such as conventional, USDA, or VA renovation loan options.
Jennifer Goldsby, NMLS #591226
VP, Renovation Lending
Diamond Residential Mortgage Corporation NMLS #186805
Equal Housing Opportunity
Disclaimer: The postings here reflect my personal opinion. They do not necessarily represent the opinions of Diamond Residential Mortgage Corporation and its management.
