- Cal Crismore
FHA 203(k) Loans: A Complete Guide
An FHA 203(k) loan – also commonly known as a renovation loan or mortgage rehabilitation loan – is a government-backed loan that can be used to fund both a home’s purchase and renovations under a single mortgage.
What Is An FHA 203(k) Rehab Loan?
A FHA 203(k) Rehab Loan is a loan that allows you to purchase or refiannce a home that is in need of repairs and/or renovations, and borrow the money to do those repairs and/or renovations all at the same time. The homeowners are able to combine both real estate costs and incurred renovation expenses into a single mortgage. In other words, if you're thinking of buying a house that needs multiple repairs and significant renovations, you can fold the cost of both into one home loan.
How An FHA 203(k) Loan Works
An FHA 203(k) loan is backed by the Federal Housing Administration (FHA). The loan can take form of a 15- or 30-year fixed-rate mortgage or an adjustable-rate mortgage and the funds obtained through a rehab loan can be applied to expenses associated with both materials and labor. The FHA 203(k) loan is a government-insured mortgage that may come with more flexible qualification terms and requirements than a conventional home loan.The amount you elect to borrow for home improvement and repair efforts is totaled with your other expenses and can be paid off over the course of years through monthly mortgage premiums. Rehab loans can provide a cost-effective way to finance many home improvements, especially large ones. You'll need to meet specific qualifications in order to be approved for a mortgage, including factors such as your income, credit history, credit score and debt-to-income ratio. Keep in mind that any work done under an FHA 203(k) loan must begin within 30 days of closing, and all projects must be wrapped up within 6 months.
Types of FHA 203(k) Loans
There are two types of FHA 203(k) loans for you to choose from: a streamline 203(k) loan and a standard 203(k) loan.
Streamline 203(k) Loan
A streamline 203(k) loan, or limited loan, can be used for homes that need fewer repairs and provides up to $35,000 for renovations. The best part about this type of loan is that there is no minimum cost requirement attached and applications will be simpler to process because you're borrowing lower sums of money. Just keep in mind that you won’t be able to roll major structural repairs into the equation.
Standard 203(k) Loan
The standard 203(k) loan is the go-to choice for most home buyers because it allows them to purchase a fixer-upper and make repairs that exceed $35,000. HUD requires a consultant to manage the project and renovations and they are to meet inspection approval. Furthermore, all expenses must amount to no less than $5,000. There are a select number of rules and guidelines that must be followed to ensure compliance with government code.
What Can An FHA 203(k) Loan Be Used For?
Proceeds from an FHA 203(k) loan and mortgage can be utilized to fund a variety of projects, including, but not limited to:
Improving a home’s curb appeal
Installing or repairing roofing and flooring
Making a home more energy effiecient
Fixing any health or safety hazards
Enhancing a home’s accessibility or functionality
Overhauling plumbing and waste systems
Redoing landscaping and groundwork
Repairing or renovating gutters and downspouts
Making changes that improve or modernize a home’s appearance
Keep in mind that attractions such as a swimming pool, hot tub, outdoor fireplace, satellite dish or BBQ pit do not fall under the category of eligible expenses by the FHA for a 203(k) rehab loan. FHA 203(k) loans will only cover upgrades or enhancements that improve the property's appeal. Certain types of properties, such as mixed-use properties (which combine residential and commercial space) and co-ops, may also not be eligible for this type of loan.
FHA 203(k) Loan Requirements
In order to qualify for a rehab loan, home buyers or homeowners must meet certain minimum requirements. These are similar to the standard FHA loan requirements. Some of the requirements include:
An FHA-approved lender is necessary to apply for an FHA 203(k) loan.
Lenders require applicants to possess a minimun credit score 500.
FHA 203(k) loan eligibility depends on credit score; those with a score of 580 or above only have to put down 3.5%, while others need 10%.
Lenders will calculate your debt-to-income ratios, for an FHA 203(k) which your front-end DTI should not be more than 31% and your back-end DTI no greater than 43%.
A 203(k) loan can only be used on the borrower’s primary residence.
Only professional contractors can perform the repairs or renovations, not the borrowers themselves.
How To Refinance Your Home With A Rehab Loan
FHA 203(k) loans aren't just for people buying property; current property owners looking to renovate a piece of real estate they already own can benefit from them as well. If you qualify for an FHA 203(k) loan, a portion of the money you borrow will go towards paying your existing mortgage balance. The leftover funds will stay in escrow until all the repairs are done and then used to pay these bills.
If you have an existing FHA 203(k) mortgage, you may be able to refinance it under the terms of the FHA streamline program. Refinancing could lead to a lower interest rate and monthly payment.
Should You Consider A Rehab Loan?
Weighing the pros and cons of an FHA 203(k) loan will help you decide if this is the right type of loan for you.
Pros Of FHA 203(k) Loans
Low credit score and down payment requirements.
Competitive interest rates compared to other loan types
Ability to combine home purchase and renovations into a single loan
Low down payment and credit score requirements
Can provide temporary housing while a home is being repaired
Cons Of FHA 203(k) Loans
Requires an mortgage insurance premium (MIP)
Application process can be time consuming
FHA 203(k) loans can only be used for primary residences
A HUD consultant is required
The closing costs for FHA 203(k) loans are usually the same as other types of mortgages and refinancing. These expenses go to cover standard fees such as those for appraisals, inspections, lender origination, title search and insurance, credit reporting, property surveys and more. Select lenders may apply additional fees for extending these loan packages, though.
Does An FHA 203(k) Loan Sound Right For You?
An FHA 203(k) loan could provide you with an excellent opportunity to finance both home refinancing and remodeling at an affordable price. Before you begin the application process, compare lenders and FHA project terms to see if this type of financing is right for your fixer-upper. We recommend that you read more about conventional mortgages before making a final decision. This is just one of the many solutions available to those looking to finance an impending home purchase or luxurious upgrades.
Avance Group; Your Local Mortgage Broker
If you're thinking about renovating your home in New Mexico, Avance Group is a local mortgage broker that can help you with your FHA 203(k) loan! Call us today at 817.524.6655 to get started!