The FHA 203(K) renovation loan allows a qualified borrower to purchase or refinance a home and finance with one loan, the cost of renovations/repairs into their overall loan, not to exceed 110% of the after-improved value of the home. The repairs allowed on a 203(K) are not restricted to FHA required repairs that would be deemed necessary by a consultant and/or appraiser but can include a “wish list” of items such as:
- Modernization and improvements to the homes function
- Structural alterations and reconstruction
- Elimination of health and safety hazards
- Reconditioning or replacing of 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
- Changes that improve appearance and eliminate obsolescence
Luxury items such as installation of a pool, BBQ pit, or even a hot tub are not allowed.
FHA offers two versions of the 203k program, Limited 203(K) and Standard/Full 203(K).
This program allows the borrower to finance into the loan limited/non- comprehensive repairs:
- repairs that are not structural in nature,
- do not require plans, and
- cost less than $35,000 in total renovation costs including miscellaneous fees which we will address later in this document.
NFM Lending requires a minimum of $3,500 in repairs for this program. A HUD consultant is not required to perform an inspection of the property on this type of renovation program but may be used.
Work cannot displace the borrower from the home for more than 15 days. If the house will be vacant for longer than 15 days, the Standard 203(k) must be used. The Limited program allows a disbursement at closing up to 50% of the estimated materials and labor costs before beginning construction but 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.
The Standard/Full 203(K) program allows the borrower to finance in many more items than the limited program. Repairs with this type of 203(K) can include structural alterations, conversions from 1 to 4 units, work that requires plans, and many more. A HUD approved consultant is required. The borrower must meet with the consultant to determine not only the mandatory items but any “wish list” items that are to be included in the cost of repairs.
With the Standard program, the borrower can be displaced from the home for up to 6 months. Mortgage payments can be financed into the loan for the time that the house is deemed uninhabitable during the renovation period. The HUD consultant will deem the number months that can be financed into the loan. Please inquire as to the availability of financing in mortgage payments with your 203K specialist.
All loans require the use of a licensed contractor. Any repairs including the cost, materials used, scope of work, etc., should be completely decided upon prior to closing. The borrower cannot act as their own contractor, and borrower cannot be related to the contractor. The contractor must be licensed and insured as a home improvement contractor and/or specialty contractor in the state/local jurisdiction where the work is being done. Choosing the right contractor is crucial to making sure that there are no issues after the work begins. It’s very important to obtain the contractors credentials up front and present them to NFM Lending for review as soon as possible.
The FHA 203K loan requires a down payment of 3.5% of the total acquisition cost or appraised value whichever is less, not to exceed 110% of the after improved value as allowed by HUD. The acquisition cost is defined as the sale price plus the total cost of renovations. If a HUD owned property is being purchased, special financing may apply that requires less of a down payment.
After loan closing, the renovation funds are held in an interest- bearing escrow account.
For more information about the FHA 203(K) loan and how you can finance renovations or home improvements, fill out the contact form below and one of our licensed renovation loan originators will be in contact with you soon.
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