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The Federal Housing Authority has a program called 203(k) Rehabilitation Mortgage Insurance program that provides a way for people to finance fix-up costs into a home purchase or to use the money to fix up a home they already own. FHA 203(k) loans are available for both those who are buying a home that needs some rehab work, as well as for those who already own a home, and who want to finance costs they need for rehabilitation and renovation through an FHA insured mortgage loan
Through the FHA 203(k) program, existing homeowners and soon-to-be homeowners can borrow extra money beyond the amount of the value of the property being used for the mortgage. The extra money is used to pay for costs associate with repairing, improving, or upgrading their homes.
Some Background on the 203(k) Loan Program
The Federal Housing Administration was created in the 1930’s to facilitate home ownership among people who couldn’t otherwise afford it without assistance from the federal government. FHA makes housing costs more affordable by insuring loans provided by FHA-approved lenders. FHA doesn’t provide loans directly.
Section 203(k) of the FHA code makes special provisions for homes that need to be fixed up to be made livable, which gives opportunities to prospective homeowners to find neglected or otherwise distressed homes and improve their condition. Section 203(k) also makes it to that homeowners whose homes are in disrepair can improve their conditions without having to get a home equity line of credit or other type of financing.
In summary, FHA 203(k) loans exist to both improve the conditions of homes and neighborhoods and to allow low-income consumers to own and live in housing that is updated and livable.
Minimum and Maximum FHA 203(k) Loan Amounts
The minimum amount that can be borrowed using the FHA 203(k) mortgage program is $5,000. The maximum amount that can be borrowed varies, but can exceed $1 million. The maximum amount available through the 203(k) program depends upon factors that include the location of the home, appraisal values, expected cost of rehabilitation, anticipated final value of the home, and elements of the legally defined FHA mortgage limits, which vary from county to county throughout the US.
If you are working with an FHA-approved lender, you can get specific details on how much loan you (and your target property) qualify for.
Limited 203(k) Loans: There is a special version of the FHA 203(k) loan that is called a Limited 203(k) Loan (formerly called Streamline 203(k) ). A Limited 203(k) loan follows an expedited process that requires less paperwork. The maximum amount available through a Limited 203(k) loan is $35,000.
Which Types of Homes Qualify for FHA 203(k) Loans?
The FHA has specifically designated which types of homes qualify for their 203(k) program. In order to qualify for one of these loans, the home you’re buying (or currently occupy and want to fix up) must be one of the following:
- A home for up to 4 single-family units that has been completed for a year or more.
- A home that has been demolished. In this scenario, at least a portion of the existing foundation must still remain intact.
- A home (either one built on a foundation or a modular or mobile home) that is being re-located
- Some condos can qualify, in buildings where up to 4 condos exist; in this case, rehab money can only be used for interior costs.
- Conversions where a single residence is being converted into multiple dwellings (up to 4).
How to Obtain a FHA 203(k) Loan
FHA 203(k) approved loans must be obtained through an FHA approved lender.
Most major lenders are FHA approved. If you want to search specifically for an FHA approved lender in your area, you can do so using the HUD Lender List search online. If you are currently using a lender or considering one, you can simply tell them about your plans to use the FHA 203(k) program, and they should be able to tell you whether they are qualified or not (experience is a big factor in addition to being technically capable) to help you get a mortgage that falls in that program.
Although any lender that is FHA-approved can provide you with an FHA 203(k) mortgage, it’s best to work with someone who is more familiar with the process and whose specialty involves dealing with that type of loan on a regular basis.
The HUD (US Department of Housing and Urban Development) publishes a list of the largest FHA lenders based upon the number of loans they do annually. Here is a short list of the top 203(k) lenders, including links to their websites, and :
- Homebridge Financial, Headquartered in Iselin, New Jersey with branches in 19 states – Phone: 888-266-4930
- loanDepot, Headquartered in Southern California with branches in all 50 states – Phone: 888-983-3240
- Movement Mortgage, Headquartered in Indian Land, South Carolina with branches in 49 states – Phone: 877-314-1499
- Home Point Financial Corporation, Headquartered in Dallas, Texas – Phone: 800-686-2404
- Guaranteed Rate, Inc. (Rate.com), Headquartered in Chicago, IL – Phone: 866-934-7283
Advantages of FHA 203(k) Loans
FHA 203(k) loans have many of the same advantages of other FHA loan programs, including requiring low down payments, and competitive interest rates even for people who don’t have the top credit scores. There are many advantages that 203(k) mortgages have over other types of home financing.
Some of these advantages include:
- Lower required credit score: 620 (some lenders require 640 or higher)
- Low 3.5% down payment
- Allowance for spending mortgage money on rehabilitation projects
- Both adjustable and fixed-rate mortgages are available with this program
- Mortgage can include enough money to make monthly payments for up to 6 months (while repairs are being made)
Restrictions for FHA 203(k) Loans
As you might expect, as this is a government program (a taxpayer-funded subsidy) there are several restrictions and limitations for FHA 203(k) loans, there are several restrictions that govern FHA 203(k) mortgage loans, including:
Must Use a Licensed Contractor for Home Upgrades an Repairs
Repairs on FHA 203(k) financed homes must be made by a licensed contractor. This means that you can’t be a do-it-yourselfer and get a loan hoping to build sweat equity by performing the labor yourself, except in cases where you happen to be a licensed contractor.
No Investment Properties
A home that is being used for a 203(k) loan must be a primary residence. Investors cannot use 203(k) loans to purchase and fix up investment properties.
Creditworthiness of Borrower
Similar to credit requirements for other FHA programs, those who choose to go the route of getting a 203(k) loan must meet the credit requirements for the program. A 620 credit score is the minimum acceptable. The borrower must have a stable job history and provide proof of income. Also, there must be no late payments reported on a borrower’s credit in the past year, and no bankruptcies or foreclosures in the previous three years prior to applying for a 203(k) loan.
Types of Repairs Allowed with 203(k) Home Loans
Upgrade and rehab money bundled with a 203(k) program mortgage can be used for almost any kind of practical upgrade to a property. The most common repairs paid for by 203(k) money include:
- HVAC system repair or replacement
- Updating or repairing electrical and plumbing systems, including a well or septic tank
- Window or door replacement
- Accessibility improvements (e.g. wheelchair access ramps)
- Removing lead-based paint hazards (for homes built before 1978)
- Other practical repairs and/or upgrades necessary to make the home more livable
Is an FHA 203(k) Loan Right for Me?
Hopefully this information has been helpful in giving you an education about why the FHA 203(k) program exists, and how it works. If you’re in a position to buy a fixer upper home, or if you’re currently living in a home that is in need of repairs to make it livable, you may be a candidate for this government-backed loan program.
To find out more specifics about whether this type of loan will work for you, it’s a good idea to talk to a lender as well as getting some advice from a real estate agent if you have one you trust to help you with making a purchase offer on a home that needs to be repaired.