House To Home With A 203(k) Loan
If you are buying a home that needs minor or major repairs, an FHA 203(k) Loan is a popular rehab loan program for homebuyers that allows them to include the costs of renovations in the original loan amount. Homeowners can also use the FHA 203(k) loan in place of a cash-out refinance for home improvement projects.
How Do I Get Approved?
Getting approved for an FHA 203(k) loan is the same process as a standard FHA home loan as far as credit, income, employment is concerned. The difference with the actual 203(k) renovation layer is that the bank approves and disburses payments to your 203(k) contractor for the project as well.
How Do I Choose A Good 203(k) Lender?
Experience counts the most when shopping for the best FHA 203(k) Lenders for you home improvement loan. Make sure your loan originator and their mortgage company have recently closed 203(k) loans. The location of your 203(k) lender is not as important as their experience.
Help! I Am Already In A Contract.
It is common for buyers to get stuck with an inspection item that traditional mortgage programs require to be fixed prior to funding a loan. The benefit of FHA 203(k) loans is that the program will allow for upgrades to be completed after funding. Feel free to call us directly at (908) 970-9798 to talk about your options.
The FHA 203(k) Loan Advantage
FHA 203(k) and other rehab home loans give buyers the advantage of shopping for a property based on the best location and value.
The reason why these types of home improvement loan programs are so popular with buyers is because through the Federal Housing Administration (FHA) 203(k) Rehabilitation program, borrowers can purchase or refinance their home and include repair costs within a single mortgage.
A 203(k) loan has a lower down payment requirement compared to other rehabilitation options for financing, which puts rehab projects in reach for individuals who otherwise could not afford them.
Borrower eligibility and credit qualifications for this product are the same as any other FHA loan, with the same FHA maximum mortgage limits applying.
203(k) Loan Benefits
- Longer Terms - 30 year fixed rate mortgages offered!
- Finance Upgrades - Cosmetic and structural rehab work.
- Flexible Underwriting - Standard FHA credit guidelines.
- Get What You Want - Buy a property, turn it into a home.
- Increased Values - Improve the resale value and save money.
- Energy Efficient Upgrades - Save on utility expenses.
- Low Down Payment - FHA allows for higher loan-to-value loan amounts.
- Perfect "Fixer-Upper" Loan - New paint, carpet, kitchen remodel, and the list goes on.
- Discounted Listings - Get a better deal when buying a property that needs a little TLC.
The 203(k) rehabilitation mortgage program was intended to expand homeownership opportunities and affordability while revitalizing communities and neighborhoods by providing financing for properties that need renovation work to make them livable or sellable.
FHA's primary goal is to help borrowers purchase a home they may not otherwise be able to finance based on the down payment requirements of most conventional loan programs. To further that goal, FHA 203(k) Loan offers favorable loan terms, higher loan limits, and flexible down payment options to qualified buyers.
Benefits Of Rehab Loans
Available for both minor cosmetic or major structural home renovation work, FHA 203(k) Loans can be used when buying a home as well as for current homeowners through a refinance.
Renovation loan program helps preserve or increase neighborhood real estate values, as well as create employment opportunities for FHA 203(k) Contractors.
Whether it is that fantastic foreclosure deal, adding a new deck, getting rid of that shag carpet, updating appliances, saving the purchase deal that the bank turned down due to property condition or a major remodel that turns an ordinary house into your dream home, the FHA 203(k) loan can help you.
There are two types of FHA 203(k) loans you can use to buy and fix up a property, and choosing the type that suits you best will depend on the amount and type of improvements your property needs:
The Standard 203(k) can be used for major improvements totaling over $35,000 and an "FHA 203(k) Consultant" is required, along with one bid from a contractor.
A Limited 203(k) can be used for rehab and repairs of up to $35,000 and it requires a bid per contractor.
Note: Any repair affecting the structure / foundation of a home would have to be done under the Standard 203(k), irrespective of the amount of repair.
Eligible Repairs
- Repair/Replacement of roofs, gutters, and downspouts.
- Repair/Replacement/Upgrade of existing HVAC, plumbing, and electrical systems.
- Minor remodeling, such as kitchens, which does not involve structural repairs.
- Exterior and interior painting, including lead based paint stabilization or abatement.
- Weatherization, including storm windows and doors, insulation, and weather stripping.
- Purchase and installation of appliances, including freestanding ranges, refrigerators, washers/dryers, dishwashers, and microwaves.
- Improvements for accessibility for persons with disabilities.
- Repair, replacement or the addition of exterior decks, patios and porches.
- Basement waterproofing or remodeling which does not involve structural/sculptural repairs.
- Window and door replacement and exterior siding replacement.
- Well or septic system repair or replacement.
Ineligible Repairs
- Luxury items and improvements that do not become a permanent part of the real property are not eligible as a cost rehabilitation.
- Some examples include: barbecue pits; bathhouses; dumbwaiters; exterior hot tubs, saunas, spas and whirlpool baths; outdoor fireplaces or hearths; photo murals; swimming pools; television antennas and satellite dishes; tennis courts; tree surgery.
- However, the homeowner can use the 203(k) program to finance such items as painting, room additions, decks, and other items, even if the home does not need any other improvements.
- Existing structural damage and foundation repairs.
All health, safety, and energy conservation items must be addressed prior to completing general home improvements.
10 Step Quick Start Guide
You can Call us at (908) 970-9798 for any questions about renovation loans, or CLICK HERE to submit a contact request online and schedule a time to speak with a licensed FHA 203(k) Lender about your scenario and goals.
The following outline highlights the general loan approval and renovation process:
Step 1) Get Pre-Qualified
Having a pre-qualified 203(k) loan will:
- Ensure you know the price range of homes to be shopping and are comfortable with the total monthly payment, down payment, and costs to close.
- Help you understand the process and requirements of the FHA 203(k) loan.
- Put you at the top of the list when presenting your offer.
- Expedite your closing process.
Heads up! Of the lenders who can offer FHA 203(k) loans, very few have the level of experience or the dedicated operations staff to close your loan in a timely fashion.
Click Here to apply online and see what mortgage amount you are eligible for.
Step 2) Searching For A Property
A great way to expedite the closing process is to interview contactors while you're searching for a property. It is your responsibility to select the contractor and we will help educate you on the process.
Many clients have also found it beneficial to spend time at local hardware stores researching possibilities and prices.
When searching for a property, the property can be a single-family residence, 2 to 4 units (e.g. duplex, triplex or fourplex), condo, or PUD. There are different maximum loan limits that apply and will vary depending on the county in which the property is located and the number of units in the property.
Step 3) Making The Offer
You've found a house! Before meeting with your agent to make the offer, develop a list of possible renovation options. I would suggest you develop the following lists:
Must Do List (addresses health and safety)
- Meet with an FHA 203(k) Consultant that can do a feasibility analysis for you. This analysis will show you what is necessary to get your home into shape so that it meets FHA minimum property standards.
- Appraiser may add to this after viewing the property.
- The consultant report takes what has to be done and then allows for your "Wish List" to be added.
Wish List
This is the time for you and your real estate agent to sit down and determine an appropriate purchase price, while taking into consideration a very rough estimate of additional money needed for work to be done. When making the offer to the seller, the offer you make is for the purchase price only and will not include money needed for repairs/remodel.
For Example
You want to pay $100,000 for a house and plan to roll $20,000 - $30,000 into the FHA 203(k) loan for repairs/remodel. The offer to the seller will be for $100,000 (the "as is" price); the additional money for repairs/remodel will come from the lender and should not be included in the offer to the seller.
Meeting with your contractor and your 203(k) consultant before submitting an offer can be very helpful. In your contract, you can specify the necessary dates and deadlines, allowing you the time required for completing all inspections and gathering all estimates.
Step 4) Submitting The Offer
This step is your real estate agent's responsibility; however, it is beneficial for you to understand the requirements, so you can review your offer prior to your agent submitting it to the seller.
When writing the contract, many real estate agents specify (under additional provisions) that the buyer will be obtaining an FHA 203(k) loan. This is a great place to give the listing agent and seller advance notice because if the property is not currently in the FHA required condition, they know you have a strategy to address all necessary repairs, and FHA 203(k) loans may require more inspections and different dates deadlines than a typical transaction.
It has been my experience that many clients are awarded the winning bid because their offer specified the buyer will be obtaining an FHA 203(k) loan. This is especially the case when bidding on a foreclosure, REO, bank owned, and short sale properties because the bank knows that the loan can close despite the condition of the property, unlike all other types of loans.
When obtaining an FHA 203(k) loan, all work is done after your closing, so the closing time frame is similar to a typical transaction - real estate agents and sellers love this.
Step 5) Feasibility Study Or Full Work Write Up
Congratulations! The offer has been accepted, the clock has now started, and it's time for you to:
Order Your Inspection:
We will guide you through the inspection. NOTE: If you think it is possible that you will be obtaining an FHA 203(k) Standard loan, you will want to have the FHA 203(k) Consultant do a feasibility study prior to performing the full work write up. Contact me for details.
Meet With The Contractor And FHA 203(k) Consultant:
You'll go over the estimate of all the repairs, updates, and rehab that will be done to the property.
Contact Your Loan Originator:
To discuss the outcome of your meetings with your contractor and the FHA 203(k) Consultant and determine the best loan option to suit your needs. If you have additional repairs required as an outcome of your home inspection, these repairs can be included into the estimate as well.
Step 6) The Appraisal Is Ordered
Once your inspection has been completed and you have received all estimates giving you a breakdown of the costs of the work to be done, your loan originator will order the appraisal. The appraiser will go out to the property and give an "as is" value as well as an "after improved" value (also known as a "subject to" value).
Note: On a purchase, the "as-is" value is what you are purchasing the property for.
Step 7) Verifying The Loan Amount
Now that the appraisal has been completed and received, your loan numbers can be finalized.
On a purchase transaction, the maximum loan amount is based on lesser of the following multiplied by 96.5%:
- 1. The As-Is value or the purchase price of the property before rehabilitation (whichever is less) plus the estimated cost of the rehabilitation.
- 2. 110% of the After-Improved Value of the property (100% for condominiums)
On a refinance, the maximum loan amount is based on the lesser of the following:
- 1. The existing debt of the property before rehabilitation, plus the estimated cost of the rehabilitation and allowed closing costs.
- 2. 97.75% multiplied by the lesser of:
• The As-Is value plus rehabilitation costs; or
• 110% of the After-Improved value (100% for condominiums)
Closing costs and prepaids can be financed on a refinance transaction if equity is available.
The rehabilitation cost will also include contingency reserve. Contingency reserve is the required buffer, covering unforeseen situations that may cause you to need more money to complete your project. Depending on your project's complexity, the lender may appropriate 10% to 20% of the total remodeling costs to the contingency reserve. After completing your project, all unused money will be applied to the principal balance of your loan.
Step 8) Loan Approval
The loan package has now been completed, submitted to underwriting, and approved. Once the loan is approved and conditions are satisfied, the final documents are ordered and signed.
Step 9) Closing
This is when everything is now in line and ready to fund. The wire/loan proceeds are disbursed to pay off the seller, as well as to set up the escrow account for the improvements to be made after closing.
Final HUD-1 Statement is the real estate document containing all your final numbers and your Closing Disclosure which includes the exact amount of money you need to bring to the closing table. This will be available 3 days prior to closing.
Step 10) Inspections and Draw Disbursement Checks
If your loan is a Limited 203(k), there can be at the most two inspections and two checks. One up-front check within a few days of closing is also allowed.
If your loan is a Standard 203(k), there can be at the most five inspections and five checks. One up-front check within a few days of closing is also allowed.
Let's Talk About Renovation Lending Options
Talk with a licensed 203(k) lender to see what your scenario or property may be eligible for.
(908) 970-9798
203(k) Lender
FHA 203(k) Frequently Asked Questions
You can also call us at (908) 970-9798 to speak with a licensed renovation lender.
Click Here to apply online for a Pre-Qualification or Pre-Approval.
A pre-qualification is an assessment of your loan qualification by pulling a credit report and by using the financial information provided by you. You are not required to submit any documents for a pre-qualification.
A pre-approval is an assessment of your loan qualification based on your credit report and data/documents of your income, assets and liabilities. Following are the documents generally required for pre-approval as applicable for the applicant:
Salaried Income:
- Pay stubs covering one full month (2 pay stubs if you are paid biweekly, 4 pay stubs if you are paid weekly)
- W-2 forms or Form 1040 for recent 2 years with all supporting schedules
Self-Employed Income:
- Form 1040 for recent 2 years with all applicable schedules
- Form 1120S / Form 1120 / Form 1065 Corporate tax returns for recent 2 years with all supporting schedules
- Year to Date Profit and Loss Statement and Balance Sheet if more than a calendar quarter has elapsed since filing date of most recent calendar or fiscal year end tax return
- Form K-1 for recent 2 years with all supporting schedules
Other Income Documents:
- Recent Social Security Award letters
- Recent Disability Award letter
- Recent Pension Award Letter with proof of 3 years continuance
- Recent Bank Statements of 2 months
With a lower down payment requirement compared to other rehabilitation options for financing, more individuals can obtain this financing rehabilitation option. The benefits of 203(k) loan include the following:
- It provides the funds for rehabilitation of the property, on purchase or refinance of existing property.
- It helps buyers who are interested in buying a property in need of modernization and repairs. With a 203(k) loan, the borrower may simply obtain one mortgage at a long-term fixed rate, to finance both the acquisition and the rehabilitation of the property.
- It helps low to moderate income families, first time buyers, or buyers with limited cash, to purchase a home with as little as a 3.5% down payment.
- The loan amount is based on the projected value of the property with the work completed, including the cost of the rehabilitation.
The Limited 203(k) program is intended to facilitate rehabilitation and/or improvements to a home for which plans, consultants, engineers, and/or architects are not required.
The maximum repair amount is $35,000, with no minimum requirement for repairs.
Yes. The U.S. Department of Housing and Urban Development (HUD) requires that properties financed under this program meet basic energy efficiency and structural standards in compliance with HUD's Minimum Property Standards and all local codes and ordinances.
A Physical Inspection of the property by a Home Energy Rating System (HERS) or energy consultant will determine the cost of the energy improvements and the estimate of the energy savings. The entire cost of the HERS or energy consultant can be included in the mortgage.
The energy savings estimate in new construction must be based upon a comparison of plans with the additional energy saving improvements to the house that meet the current FHA energy conservation standards. Presently, these standards are those of the 2000 International Energy Conservation Code (IECC).
The energy inspection of the property must be performed prior to completion of the work write-up and cost estimate to assure there is no duplication of work items in the mortgage.
After the appraisal is completed, the cost of the energy improvements are calculated by the lender to determine how much can be added to the mortgage amount.
The Feasibility Study helps a 203(k) loan by providing a rough cost-estimate of the work and the expected market value of the property after completion of the work, which will help with pre-qualifying the borrower and avoid spending too much on repairs and improvements without a return in home value. To estimate the market value of the property, look at the comparables with like improvements and the average sales price in the neighborhood or get a Home Inspection.
The following items are completed to determine the value of the property to the purchase price (or existing indebtedness):
- The extent of the rehabilitation work required.
- The expected market value of the property after completion of the work.
- Rough cost estimate of the work.
A HUD Consultant is required on Standard 203(k) loans. The Consultant evaluates the property to determine what is required to meet FHA minimum property standards and determines what work should be done, while taking into consideration particular non-FHA required improvements the borrower would like to make.
The Consultant ensures that the property meets program guidelines, provides the Work Write-Up and Specification of Repairs.
The Consultant will have experience as a contractor and be thoroughly educated with FHA requirements, which adds an extra layer of information and protection for all parties involved.
The appraiser will use the consultant’s report to determine the after-improved value.
Documents The HUD Consultant Submits:
- Work Write-Up
- Specification of Repairs
- Master Draw Request
- Consultant's Identity of Interest Certification
- Consultant/Borrower Agreement
A Plan Reviewer inspects the property and the plans as well as provides guidance without preparing architectural exhibits. A HUD Consultant can also be a Plan Reviewer.
Utilizing a Plan Reviewer is recommended on purchase transactions before entering into a purchase contract.
The Contractor Bid should be in line with the current market labor and material cost.
- If a Consultant is involved, the Contractor Bid must mirror the consultant’s Work Write-Up and/or Specification of Repairs.
- The bid must be written in specific line item format that breaks down both labor and material costs.
- The bid should include the contractor's contact info, license info, and the subject property address.
- A Plot Plan of the Site is required when a new addition/improvement is being made to the structure.
- A Proposed Interior Plan of the dwelling is required to show where structural changes are contemplated, including an addition to the dwelling.
The customer always has the option of ordering a home inspection in addition to the inspection made by the HUD-approved consultant or third-party inspector. Also, your lender may require a home inspection based on the review of collateral and/or repairs.
Yes. Certain restrictions apply to condominiums. These are based on limiting the renovations to interior work, the number of units in the project and the number of units undergoing renovation at one time. Ask your Renovation Director for details.
Work must begin within 30 days of closing and must be completed within six months. Also, work cannot stop for periods greater than 30 days. However, for unavoidable circumstances an extension can be approved.
Work must begin within 30 days of closing and must be completed within six months. Also, work cannot stop for periods greater than 30 days. However, for unavoidable circumstances an extension can be approved.
Yes, as long as the home is habitable, per city and county regulations, and no mortgage payments have been financed.
Payments are due and payable as disclosed on the promissory note signed at closing. If the property is not habitable during the renovation, up to six months of payments can be financed based on the estimate of months needed to complete the work. In this instance, payments would be due from the customer the first day of the month after the property is habitable, upon the renovation completion date, or the seventh month after closing, whichever comes first. Any financed mortgage payments that are not needed will be applied to the principal balance of the loan after the final draw is processed and the renovation escrow account is closed.
*Does not apply to Limited 203(k) loans.
Your renovation escrow account amount is based on the cost of the work listed in the Work Write-up or detailed bid. To receive reimbursement for non-listed expenses, a change order would need to be submitted and approved before doing the additional work. If the change order is not approved, any materials purchased or work done outside the Scope of Work is the customer’s responsibility.
Typically, renovation loan funds are not released before work is completed. Funds are disbursed after work has been completed and inspected. However, there is an option for contractor to request initial draw to front the cost of construction. A copy of the supplier’s invoice is required and the check is made payable to the supplier for the deposit (maximum 50% of item cost). The remaining funds for the item would be released after the item is received, installed, and inspected.
A contingency reserve is either collected or financed to pay for any unforeseen repairs. A change order form needs to be completed, signed by all parties, and sent to your renovation director for approval prior to the additional work being completed. Once the change order is approved, the necessary work can then be completed and funds will be released after the completed work is inspected.
It can either be used to do additional repairs, if approved by the renovation director, or applied to the principal balance of the loan. If the customer did not finance the contingency reserve, it can be refunded in cash.
If unused funds remain in the renovation escrow account when all work is complete, money for repairs, clearly identified as being paid in cash by the customer during the renovation phase, may be given back. All financed renovation funds must be applied to the principal balance of the loan if not used for additional repairs at completion.
Most renovation loan guidelines require that 10-20% of repair costs be kept in a reserve account to cover unforeseen repairs or cost overrides. These funds can be financed as part of the loan.
As funds are released, 10% is held back until all renovations are complete and a final inspection takes place. Once all parties agree the work has been completed satisfactorily and no liens have been filed against the property, all holdbacks will be released.