FHA 203k Construction Loan
An FHA 203k loan is a way of saying a rehab loan. It means you can do construction projects on your home or purchase and have the costs of the rehab included in your new mortgage!
How does an FHA 203(k) loan work?
There are two types of FHA 203k loans: limited — sometimes referred to as “streamline” — and the standard. Limited and standard 203k loans have different rules about how much you can borrow for renovations and what you can do with the money. Improvements the FHA deems luxuries, like a swimming pool or an outdoor kitchen, generally aren’t eligible for either one. 203k loan borrowers are also bound by FHA loan limits, which vary by location. The FHA determines the value of the property in two ways, accepting whichever number is lower. The first way is to add the cost of renovations to the original value of the property. For example, if the home was originally valued at $400,000 and the loan limit in your area is $524,225, the cost of renovations cannot exceed $124,225. The other way that the FHA determines value is to multiply the new value of the home after renovations by 110%. This number cannot exceed the FHA loan limit.
Limited 203(k) Mortgage: Minor Repairs
A limited 203 (k) loan would usually be used to pay for a home that does not require much work. This option does not include structural work, such as adding new rooms or landscaping, and the home must be habitable throughout the renovation period. Repairs under the limited 203(k) are capped at $35,000.
Quick Guide:
- Permits homebuyers and homeowners to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home.
- Homebuyers and homeowners can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an FHA appraiser.
- Homeowners can make minor remodeling and non-structural repairs, improvements, or prepare their home for sale.
- Homebuyers can make their new home move-in ready by remodeling the kitchen, painting the interior, or purchasing new carpet.
Standard 203(k) Mortgage: Extensive Work
The standard 203(k) includes any extensive repairs and structural work needed in the home, with no capped repair cost. The minimum amount that can be borrowed is $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area.
Some of the repairs that an FHA 203(k) loan covers include plumbing, flooring, painting, heat and air-conditioning systems, bathroom and kitchen remodeling, improvement of health and safety standards, landscape improvements, implementing access tools for disabled persons, the addition of energy conservation systems, and window and door replacements. Renovations that are considered extravagant or luxurious—such as tennis courts, gazebos, and new swimming pools—are not covered under an FHA 203(k) loan.
Quick Guide:
- The Standard 203(k) program is for the major rehabilitation and repair of single-family properties.
- The cost of the rehabilitation must be at least $5,000 but the total value of the property must still fall within the FHA mortgage limit for the area.
- The Standard 203(k) program is an important tool for major renovations, structural additions, community, and neighborhood revitalization, as well as to expand homeownership opportunities.
Stages in this Process
Origination Stage
- Borrower owns or finds a property that requires rehabilitation.
- Borrower talks to an FHA-approved lender and selects FHA 203(k) program.
- Lender selects a 203(k) HUD-approved consultant from the roster. This step is optional for the Limited 203(k) Mortgage.
- Consultant visits the home with borrower and prepares a work write-up and cost estimate.
- Work write-up and bids are provided to the lender.
- Lender processes, underwrites, closes, and funds the transaction.
- Lender submits the loan for endorsement and FHA insures the loan.
- Improvements can begin.
Repair/Improvements Stage
- Contractor obtains necessary permits prior to the start of the project.
- Contractor completes the first phase of the project.
- Borrower contacts the 203(k) consultant to request an inspection for draw release.
- Consultant and borrower inspect the work and consultant certifies work is satisfactory.
- Consultant and borrower sign the draw release and submit to lender for payment.
- Lender issues a two-party check made payable to borrower and contractor.
- This process continues until all work is completed.
Project Completion Stage
- Borrower provides a release letter indicating all work is completed.
- Consultant verifies completion.
- Consultant obtains certificate of occupancy or building permit close-out approval if applicable.
- Remaining escrow funds are released.
- Lender is responsible for closing out the entire project on the Escrow Close-Out Screen in FHA Connection.
Can You Use a 203(k) Loan for All Improvements?
No. Anything considered extravagant or luxurious—such as a tennis court, gazebo, or a new swimming pool—is not allowed. However, most repairs and upgrades do qualify, including rehabbing an existing swimming pool.
Refinancing with an FHA 203(k) loan
You can apply for a 203(k) loan even if you already own a home. In this case, the 203(k) loan will pay off the original mortgage, and the remaining balance will go into an escrow account that pays for the improvement projects. Again, 203(k) loans are bound by FHA loan limits. This means that if you have a conventional loan that exceeds this limit in your area, you won’t be able to refinance it into an FHA 203(k). This is less likely to be a concern in areas with a particularly high cost of living, such as San Francisco or the Washington, D.C., metro area, where the FHA loan limit matches the conforming loan limit at $1,209,750.
Purchasing with an FHA 203(k) loan
Yes! You can purchase a property with an FHA 203k loan. It works the same way if you already owned it. Any property that is not FHA complaint can be brought into FHA compliance with a 203k loan pending any violations are subject to the rehab project. Don’t let a home get away that could be your dream home.
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