The Home Buyer's Korner

Information presented should be used for educational purposes only.

February 16th, 2017

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FHA 203(k) Home Renovation Loan Program

FHA 203K home improvement loan or what I like to refer to as “Buy It – Fix It, All In One Loan” is offered to home buyers and current home owners, who occupy a residence as their primary home. The Department of Housing and Urban Development (HUD) allows individuals, local government authorities, and certain approved non-profit agencies to purchase or refinance a home that’s in poor condition or in need of significant repairs, and fix it up with this great home improvement loan program.

All types of home are eligible, including 1 to 4 unit homes, town homes, manufactured homes, modular housing, and approved condominiums. 

Home buyers considering a condominium or home owners living in one, need to insure that their condominium development is on the FHA Approved Project List, or meets VA, Fannie Mae, or Freddie Mac project guidelines. Furthermore, the building your unit is in, can have no more than four units including yours. However, the development can have an unlimited amount of buildings, and those building are not limited to FHA’s maximum unit count. Furthermore, it’s worth noting that all repairs are limited to the interior of your unit when using the FHA 203K to finance your home.

It’s kosher to use a 203K home loan program to remodel a home that includes some commercial space, as long as you use the money only for repairs and improvement in the residential part of your home, and the amount of commercial space doesn’t exceed these limits: 

  1. 25% for one-story building; 
  2. 49% for two-story; 
  3. 33% for three-story building.

FHA 203K home loan programs are offered in two categories:

  1. Streamlined FHA 203K home loans are for non-structural repairs and most lenders require minimum renovations cost at least $5000 in repairs and program cost, but no more than $35000. If you choose the FHA 203K streamline program your lender will expect all repairs to be completed within 30 days after you close on your home loan. The program is great for all kinds or remodeling, home improvements, energy efficient improvement, purchasing appliances to update your kitchen, or something a simple as replacing dated carpeting.
  2. Traditional FHA 203K loans are suitable for homes that require structural repairs or has a total repair, remodeling, and lender cost that exceeds $35000. You can take up to six (6) months to complete repairs, and if the home is unhabitable during the time of renovations, HUD will allows the lender to escrow enough funds to pay the mortgage interest, principal, property taxes and insurance (PITI), so the homebuyer isn’t exposed to an unnecessary burden of both a house payment and rent.

FHA 203K home renovation loans allow home buyers to purchase a home with as little as 3.5 percent down payment, which can come in the form of a gift or through an acceptable down payment assistance programand is based on the purchase price or appraised value and the needed repairsup to HUD maximum loan limits for each county or what we call parishes down here in Louisiana.

Here are just a few of the upgrades available with FHA 203K home loans:

  1. Repair and replacement downspouts, gutter, and roofs; 
  2. Repair, replacement, or upgrade electrical and HVAC systems; or plumbing;
  3. Repair or replacement of carpeting, flooring; windows and doors;
  4. Remodeling a kitchen and bathrooms;
  5. Painting either or both the interior and exterior walls, or do a complete re-siding;
  6. Lead-based paint stabilization or abatement of lead-based paint hazards;
  7. Weatherproofing with storm windows and doors, insulation, and weather stripping;
  8. Purchase and installation of appliances;
  9. Accessibility improvements for disabled persons;
  10. Repair, replacement or addition of exterior decks, patios, porches;
  11. Site amenity improvements such as sidewalks and driveways;
  12. Basement finishing, remodeling, or waterproofing;
  13. Repair or replacement of septic system and/or well, as well as hookups to local utilities;
  14. Major rehabilitation such as moving a load-bearing wall; repair of structural damage; room additions or foundation repairs.

It’s a common misconception that foundation repairs are not allowed when considering the FHA 203K home renovation loan program. So, if you notice cracks on the interior walls, trees that were planted to close to the house, and the roots are or likely to damage the foundation, or windows and doors that do not close properly, then the home may have foundation issues, but can be easily remedied with the FHA 203K home renovation loan.

Another great caveat is that HUD allows for up to 100% financing of any energy efficient improvements with your FHA 203K home loan; up to 5% of the original FHA 203K loan amount. Simply put, if you are seeking a $200,000 mortgage and request the lender to include an energy efficient mortgage with your application, you can receive an additional $10,000 to include these improvements; and not have any additional down payment requirements.

Energy-efficiency upgrades are many and include, but not at all limited to:

  1. Solar heating and cooling systems;
  2. Installation of whole house fans;
  3. Caulking and weather stripping;
  4. Furnace replacement
  5. Permanent air conditioning units;
  6. Water Heaters or additional insulation
  7. Clock thermostats;
  8. Ceiling, attic and floor insulation;
  9. Weather-proofing of windows and doors;
  10. Heat pumps;
  11. Vapor barriers.

Energy-efficient upgrades can only be included in the mortgage or deed of trust; if the total combined cost of the improvements are less than the projected dollar amount they will save the home owner over the product’s useful lifetime. To estimate the cost savings, an energy consultant will perform an energy inspection and use a Home Energy Rating System (HERS) to prepare a report.

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Organizing your home shopping experience affords a wise decision making process.

This simple home inspection tool makes your ultimate buying decision a smart one.

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