FHA 203k Loan FAQ’s

An FHA 203k loan is basically the same as a regular FHA (called a 203b), but with a twist. An FHA 203k loan permits borrowers to include repair/improvement money into their mortgage used to repair, improve, or upgrade their home. With this loan option, borrowers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a 203k Consultant, FHA appraiser or home buyer preferences (see list below). There are two types of FHA 203k Loans: Standard & the Limited. The FHA 203k Standard loan is more like a construction project, and the FHA Limited 203k Loan is for minor improvements. CLICK HERE for the FHA maximum mortgage amounts for your area.

An over-simplified example: Purchase price is $100,000. Upgrades/Repairs/Improvements will cost $50,000. Borrower’s base loan amount is $150,000 (not to exceed FHA maximum loan amount).

The purchase of a house that needs repair is often a catch-22 situation, because the bank will not lend the money to buy the house until the repairs are complete, and the repairs cannot be done until the house has been purchased. The FHA 203k loan program can help you with this quagmire and allow you to purchase or refinance a property and include in the loan, the cost of making the repairs and improvements. In addition, the interest on the FHA 203k loan qualifies for the mortgage interest tax deductions like all other mortgage loans. Therefore, the interest that the borrower pays on this “construction” can be all tax deductible! The FHA 203k loan program improves the real estate market because it requires a property to actually be improved….not just purchased. Because of the improvement requirement with the FHA 203k loan program, real estate values are increased, which helps other homeowners in the same neighborhood, invigorates communities and creates work for contractors and commerce is conducted by the purchasing of goods and services. Simply put, the FHA 203k loan program improves everything associated with it.

Any owner occupant primary residence borrower or qualified non-profit group who qualifies for an FHA loan can also qualify for an FHA 203k Loan. No investor purchases using the FHA 203k loan have been allowed since 1996.

An FHA 203k Loan can be used for one-to-four unit dwellings, such as Single Family Detached Homes, Duplexes, Triplexes, 4-plexes, Condominiums (certain restrictions apply) and Mixed-Use Residential (certain restrictions apply).

It depends on the county where the property is located. CLICK HERE for the FHA maximum mortgage amounts for your area. Or you may contact your FHA lender for this information.

Any repairs/improvements/modifications/modernizations that add value to and/or improve the property are acceptable for an FHA 203k Loan. The improvements must comply with HUD’s Minimum Property Standards (HUD Handbook 4000.1) and all local codes and ordinances. Structural modifications and any work in excess of $35,000 are ONLY allowed for the FHA 203k Standard. Luxury items such as new swimming pools, BBQ’s, Gazebos, outdoor spas, etc. are not allowed for any 203k loan. However, pool repair  is allowed on any FHA 203k loan. Examples of allowable repairs/modifications/renovations for the FHA 203k loan (not an all-inclusive list):

  • Energy Efficient upgrades (windows, insulation, solar systems, etc.)
  • Repair/Replacement of roofs, gutters and downspouts
  • Repair/Replacement/upgrade of existing HVAC systems
  • Repair/Replacement/upgrade of plumbing and electrical systems
  • Repair/Replacement of flooring
  • Kitchen remodeling
  • Painting, both exterior and interior Weatherization, including storm windows and doors, insulation, weather stripping, etc.
  • Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
  • Accessibility improvements for persons with disabilities
  • Lead-based paint stabilization or abatement of lead-based paint hazards
  • Repair/replace/add exterior decks, patios, porches
  • Basement finishing and remodeling
  • Basement waterproofing
  • Window and door replacements and exterior wall re-siding
  • Septic system and/or well repair or replacement
  • Structural repairs/modifications (moving walls, repairing foundations, etc.)

Limited 203k: $0 minimum – $35,000 maximum* (max $50k in a Qualified Opportunity Zone)
Standard 203k: $5,000 minimum – no pre-set maximum*

*The maximum is always limited by lesser of the borrowers approval limit, the FHA maximum mortgage limit for the area, or 110% of the improved appraised value.

According to HUD, for the Standard 203k, all work must be inspected by the 203k Consultant or the FHA appraiser prior the contractor receiving each draw/payment. According to HUD, on the Limited 203k , for repairs in excess of $15,000, the Lender must perform or obtain an inspection of the completed work by a third party. For repair costs not exceeding $15,000 on the Limited 203k, the Lender is not required to perform, or have others perform, inspections of the completed work. However, the Lender or borrower may choose to obtain or perform inspections if it believes such actions are necessary for program compliance and/or risk mitigation. Lenders may also ensure that the repairs and/or improvements have been completed by obtaining contractor’s receipts or by a signed Mortgagor’s Letter of Completion. If the Lender determines that an inspection(s) by a third party is necessary to ensure proper completion of the proposed repair or improvement item, the Lender may charge the borrower for the costs of no more than two inspections per each contractor. To eliminate the need and cost for an inspection of the completed repair(s) or improvement(s) when not exceeding $15,000, the Lender may accept receipts or proof of completion of the work to the homeowner’s satisfaction from the contractor. Before a final release is made, the homeowner must sign a statement acknowledging that the work has been completed in a professional and satisfactory manner.

A contingency reserve is a percentage of the repair/renovation amount (0%-20%) and its purpose is pay for any potential cost overruns or unexpected repair items. A contingency reserve is required for the Standard 203k but not required for the Limited 203k, but it is recommended to have one.

For the Standard 203k, a HUD-approved FHA 203k Consultant is required but is NOT required for an Limited 203k. However, you are allowed to hire anybody you think will help you to make good real estate decisions. It is always recommended to utilize the skills and expertise a 203k Consultant for all 203k loans, because they can add an extra layer of protection and information that only they can provide. For the Limited 203k, a 203k Consultant can be and should be used for a Feasibility Analysis and/or in lieu of the home inspection for the main purpose of determining the FHA Minimum Required Items that must be addressed. CLICK HERE for a list of all 203k Consultants in your area.

Possibly.

If the customer/borrower wants to do any work or be the general contractor, they must be skilled and qualified to do the work and do it in a timely and workmanlike manner. This means that if you want to do the work yourself or be your own General Contractor, then you MUST have experience for the type of renovations you want to do and be licensed to do such work. The work must be done in a time frame that meets HUD’s guidelines that will assure the completion of the work agreed upon in the Renovation Loan Agreement (signed at closing).

A customer/borrower doing their own work can only be paid for the cost of the materials…never the labor, yet the cost of labor and profit must be included in the loan. Contractor estimates are still required, and the loan amount is always based on those cost estimates. Money saved or not spent can be allocated to cost overruns, additional improvements, or a one-time principal balance reduction. Because of the liability for the lender allowing a customer to do their own work on a 203k, most lenders will require a contractor to complete the work 99.99% of the time.

The accreditation as a Certified 203k Contractor® is earned by a contractor who has met the requirements set forth by the 203k Contractor Certification Program, which include education on the 203k, knowledge assessment on the 203k, and verification of license, insurance, references, and financials.

In 1995, HUD stopped approving builders/contractors, eliminated this approval process and the associated database (Mortgagee Letter 95-57). Because HUD/FHA do not certify, approve, or endorse remodeling/general contractors, there is no such thing as a remodeling or general contractor being a HUD/FHA approved contractor.

Instead, HUD/FHA allow the borrower to hire whomever they want and require the lender to determine that the selected contractor is acceptable for 203k work by verifying their license, insurance, references, experience, education, and understanding of the 203k (Mortgagee Letter 00-25).

Because lenders do not educate contractors or verify their financials, the 203k Contractor Certification Program has been chartered with the responsibility of preparing contractors to do work under the FHA 203k Loan Program.

Earning the accreditation as a Certified 203k Contractor® is the validation that contractors have been properly educated on the 203k, adequately know/understand the 203k, and have sufficient and strong financials to afford the startup costs and ongoing expenses associated with 203k renovation projects.

The Certified 203k Contractor® accreditation exceeds all HUD/FHA requirements and lender underwriting guidelines.

All Certified 203k Contractors® will be listed in 203k Contractor Directory, should display the Certified 203k Contractor® logo on their marketing, and can provide you with a copy of their Certificate of Accreditation.

Go to the Contractor Search page to search for all the Certified 203k Contractors®.

Contractors need to understand the following:

  1. The customer/borrower is responsible for approving, selecting and hiring whichever contractor s/he wants
  2. There cannot be ANY conflict of interest between the customer/borrower and the contractor — no family relationship and no financial relationship
  3. HUD/FHA does not approve, endorse or certify remodeling/general contractors or builders. In 1995, HUD eliminated the database of HUD approved builders/contractors (Mortgagee Letter 95-97). Since 1995, there has been no such thing as a HUD/FHA approved builder/contractor.
  4. The lender does not approve contractors (see item #1). However, the lender is responsible for determining that the customer's selected contractor is acceptable to do the 203k project in a timely and workmanlike manner and in accordance with HUD’s guidelines by verifying the contractor’s license, insurance, references, credentials, work experience, as well as the contractor’s understanding of and competency with the 203k.
  5. The accreditation as a Certified 203k Contractor® is the verification that the borrower's selected contractor understands the 203k and meets the minimum financial requirements.
  6. The compensation structure set by HUD does not always permit contractors to receive pre-renovation deposits/start-up funds. Contractors must be financially capable of affording the start-up costs and ongoing expenses with any 203k renovation project. Ample credit lines with suppliers and subs and/or sufficient capital/reserves will be verified as part of the certification process.
  7. The Certification section is where contractors go to start the accreditation process.

At the loan closing, the lender places the rehab/improvement funds into an escrow account. The contractors are paid out of this account in a series of draws, most commonly as two-party checks. More detailed information is available in the 203k Contractor Education Course or by contacting the 203K Help Desk.

Limited 203k
Contractors receive maximum two (2) payments. Contractors may receive 50% of the material cost as a pre-construction payment, subject to lender approval and only if the contractor proves to the lender that they do not have any money to start the project but may take a few weeks to arrive. Therefore, contractors must be financially capable of paying for the start-up costs and a portion of the ongoing expenses with the Limited 203k (such as ample credit lines with suppliers and subs and/or sufficient capital/reserves). Once all the work is complete, the contractors can request final payment of the remaining portion of the job cost according to the proposal that was submitted and approved by the borrower and the lender.

Standard 203k
Contractors receive a maximum of four (4) draws/payments plus a 5th final (for the 10% holdback). There is no upfront money paid to contractors to offset the start-up costs (except for specialty order items with lender approval). Therefore, contractors must be financially capable of affording all the start-up costs and a portion of ongoing expenses with the 203k project (sufficient credit lines with suppliers and subs and/or sufficient capital/reserves is required). Contractors receive payment after stages of work are completed and inspected. For each draw request on the Standard 203k, an inspection is required.

The borrower will incur the fees normally associated with an FHA loan (contact your lender and/or real estate agent for more detailed information). In addition, other costs may include:

  • One (1) additional origination fee charged by the mortgage lender
  • Title update fees charged by the mortgage lender (ensures no contractor liens on the property)
  • Fees charged by contractors (estimates)
  • Fees charged by 203k Consultants (SOR, WWU, draw inspections, change orders, etc.),
  • Slightly higher interest rate (typically 1/4%-1/2% more than traditional FHA loans)
  • A 10%-20% contingency reserve (added into the loan amount)

Possibly.
The borrower must be a primary residence owner occupant or a qualified non-profit group. Since 1996, there has been a moratorium on non-owner-occupied investors using the FHA 203k loan (Mortgagee Letter 95-97).

However, the 203k is eligible to be used on 2–4-unit multi-family dwellings. So, if a borrower uses a 203k loan to purchase and renovate a multi-family dwelling, the non-owner-occupied unit(s) are permitted to be rented out. So, if the borrower will occupy at least 1 of the units of a multi-family dwelling (4-unit max), FHA still considers this borrower an owner-occupant even though the borrower rents out the remaining units.

This is the only type of “investor” that can use the FHA 203k Loan.

Yes, a current homeowner can do an FHA 203k Loan by refinancing their existing mortgage into either version of the FHA 203k loan, or in the cases where the property is owned free-and-clear with no existing mortgage, a new FHA 203k Loan can be placed on the property.

To ensure a smooth real estate purchase, these are the recommended steps to purchase or refi a home using an FHA 203k loan:

  1. The Home Buyer/Borrower selects an FHA-approved 203k lender and real estate agent knowledgeable with the FHA 203k loan and then applies for the loan.
  2. The Home Buyer/Borrower locates a home and after doing a feasibility study of the property with their real estate agent and 203k Consultant, a sales contract is executed. The contract should state that the buyer is seeking an FHA 203k loan and that the “contract is contingent on loan approval and buyer’s acceptance of additional required repairs by FHA/HUD or the lender or the borrower.”
  3. Then, during the inspection period …
    • On the Standard 203k, the Home Buyer/Borrower must first obtain a Work Write-up from a HUD approved 203k Consultant showing the scope of work to be done, including a cost estimate on each repair or improvement of the project and then obtain a proposal from a Certified 203k Contractor showing the exact pricing and detailed analysis of work that will be completed. Then have the appraisal performed to determine the after-renovation value of the property.
    • On the Limited 203k, a HUD approved 203k Consultant should provide a Feasibility Analysis should perform the home inspection to provide a detailed summary of the HUD minimum property requirements. Then obtain a renovation proposal from a Certified 203k Contractor and submit the proposal to the lender so that the lender can order the appraisal.
    • On both versions, the appraisal, contractor’s proposal, and the 203k Consultant’s work write-up (required only on Standard 203k) are submitted to the lender for approval.
  4. If the borrower passes the lender’s credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance of the property, the remodeling costs plus any required contingency reserves, any allowable closing costs, and mortgage payments (only on Standard 203k ... up to 6 months).
  5. At closing, the seller or previous mortgage of the property is paid off and the remaining funds are placed in an escrow account to pay for the repairs/improvements and any allowable mortgage payments during the rehabilitation period.
  6. You now own the home (or refinance is complete) and can begin the renovations.
  7. Escrowed rehab funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of the job, 10% of each draw is usually held back; this money is paid to the contractor after the lender determines there are no liens on the property.

Timelines:
For the 203k Limited –

  • The rehab work must start within 30 days after closing/funding,
  • the work cannot displace the customer/borrower for more than 15 days after closing,
  • work may not cease for more than 30 consecutive days,
  • all work must be completed within 6 months after closing (subject to lender’s guidelines).

For the 203k Standard

  • The rehab work must start within 30 days after closing/funding,
  • the customer/borrower may include 6 mortgage payments into the loan if the property will not be habitable during the renovations,
  • work may not cease for more than 30 consecutive days,
  • and all the work needs to be completed within 6 months (subject to lender’s guidelines).

Call the 203k Contractor Certification Program toll-free at (855) CALL-203K (855-225-5203) or go to the Contact page to submit a request form, which will be responded to within 1 business day.

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