What is the FHA Standard 203(k) Renovation Loan?
A renovation mortgage provides financing of both the purchase or refinance of a home, and the cost of repairs, upgrades, or updates to the property. Among the most popular and well known of the renovation loans available in the market, the FHA Standard 203(k) Rehabilitation Loan is intended for larger projects and those that include structural repairs.
This program can help a buyer completely transform a home, whether that means foundation repairs and a new roof or a beautiful modern kitchen, hardwood floors, and the addition of a master suite.
Standard 203(k) Mortgage Basics
- Total renovation costs must be at least $5000
- Use of a 203(k) consultant, an expert involved throughout the process including estimating the cost of repairs and inspecting the work performed, is required
- The appraisal report must provide an “as completed” appraised value that estimates the value of the property after completion of the renovation work.
- 10 year, 15 year, 20 year, 25 year, and 30 year term options
- One or Two Unit Homes, Manufactured Homes, Approved Condos, PUDs
- Primary Residence Only
What are the benefits?
- Complete the rehabilitation quickly
- Buyers of distressed or outdated homes often have big dreams about what the house will look like one day. When owners are funding the projects out of pocket, it might be several years before enough money is saved to turn those ideas and aspirations into reality. With an FHA Standard 203(k) mortgage the funds to begin work are available right away and the renovations can be complete within weeks or months
- Live elsewhere until the work is complete
- This program allows for financing the cost of alternate housing for up to six months. There is no need to live in a construction site or force contractors to work less efficiently due to the home being occupied during the renovation
- Refinance options available
- Not strictly a purchase program, the FHA Standard 203(k) Renovation Loan can be an excellent solution for homeowners looking to finance major improvements to an existing property
Who is eligible for an FHA Standard 203(k) Renovation Loan?
This program is to be used to renovate an existing property, not build a new construction home. The home must have been completed at least one year before the case number assignment date for the new 203(k) loan to qualify.
Eligibility will be determined by examining the borrowers’ income, assets, liabilities, and credit history and score, as well as the market value and condition of the property to be financed.
Some of the requirements include:
- Minimum repair cost of $5000
- Use of a 203(k) Consultant is required
- Only one General Contractor may be used
- Work must begin within 30 days of the execution of the Agreement
- Work must be completed within six months, or the time period dictated in the Agreement, whichever is shorter
- The amount borrowed must be within FHA loan limits which vary by county and are higher in parts of the country where real estate is more expensive
- 620 minimum FICO score
- Projects must only include allowable improvements
Some examples include:
- Structural alterations and additions (with upfront approval)
- Upgrade or modernization of central air/heat, plumbing, and electrical systems
- Repair or replace well and septic systems
- Repair termite or moisture damage
- Elimination of health and safety hazards such as asbestos & lead based paint abatement
- Basement waterprooﬁng
- Remodeling of kitchen and bathrooms
- Rooﬁng, gutters, downspouts
- Flooring, tiling, and carpeting
- Interior and exterior painting
- Siding, windows, doors, and trim work
- Energy conservation improvements
- Improvements for disability accessibility
- New free standing appliances
- Foundation repair
- Addition or replacement of exterior decks, patios, terraces, and porches
- Permanent hardscape such as driveways, walkways, retaining walls, and fences
Some improvements aren’t approved for ﬁnancing through an FHA 203(k) loan, such as:
- Improvements that are not permanently attached to the property
- Improvements for business or commercial purposes
- Landscaping that is not permanent “hardscaping” such as sod, trees, shrubbery or their removal
- Luxury items such as swimming pools, hot tubs, tennis courts, gazebos, outdoor kitchens, or saunas
In which scenarios is the FHA Standard 203(k) Renovation Loan a good fit?
Whether it’s a first home or the tenth, it can be tough for many house hunters to find everything they are looking for in one property. Maybe one home has the perfect location but the kitchen is outdated and the roof needs to be replaced. Another house is beautiful but right near the freeway and the road noise would render time outside unenjoyable. With an FHA 203(k) borrowers can purchase the home in the great location, renovate the kitchen, and fix the roof without coming up with a large sum out of pocket.
There is a lot of emotion surrounding the purchase of a home. It’s much more than four walls and a roof overhead, but a place to gather with loved ones, to relax and unwind, to raise families, and celebrate major milestones. It can also be a valuable financial tool. While there is no guarantee that a piece of real estate, or any other investment, will increase in value, many homeowners see their net worth grow as property values increase. By buying a distressed property and renovating it, it may be possible to see instant equity should the repairs and updates add more to the home’s market value than the cost of the work.
Buying a Home with a Standard 203(k) Mortgage
This program is ideal for buying a fixer upper, distressed property, or out of date home. It can also save the deal should major issues be uncovered during a home inspection. Rather than walk away from a home they love, home buyers can finance the purchase with an FHA 203(k) loan and have the funds needed to cover the cost of repairs.
Standard 203(k) Renovation Home Loan Refinancing
Consumers may not be aware that renovation loans, including the FHA Standard 203(k) Renovation Loan, can also be used to refinance an existing mortgage. This can be an excellent alternative to a second mortgage or cash-out refinance when the funds will be used to repair or renovate the subject property.
Other Programs to Consider
If the FHA 203(k) Mortgage does not work for a scenario perhaps one of these programs will be a better option:
- For smaller scale renovation projects that do not include structural updates: FHA Limited 203(k) Loan
- To finance luxury projects such as installing a pool or outdoor kitchen: Fannie Mae HomeStyle® Renovation Mortgage
- Build a new construction home: FHA One-Time Close Construction Loan