The Fixer Upper Loan: FHA 203k Loan

The 203k Loan is a solution for many: You can’t find a home you like in the neighborhood you want. You love that one house but its a little outdated. You are ready to upgrade but not ready to move. While it may not be the most common, perhaps one of the greatest applications and opportunities for a 203k loan is making a home functional those who are physically disabled.

It was a warm, sunny day when Mark was released from University Hospital. The world seemed to look on with joy—his mom glowed despite the bags under her eyes, the birds sang as they flew overhead and even his dad shot him a prideful smile, as he pulled the car up to the curb. What Mark felt was anything but joy, sure he survived the car accident but now would spend the rest of his life anchored to a wheelchair. Ben, his best friend, tried to everything he could to cheer Mark up, even going as far as naming the chair, “Dr. Smove”. Mark’s heart sunk as he thought about his life, he couldn’t walk, he couldn’t work as a roofer anymore, and he was moving back in with his parents after living on his own for over ten years. They wanted to help him get acclimated to his new life—one on wheels.

The stress of adjusting to life in a wheelchair seemed to dissipate as the weeks went by. Mark attended physical therapy and over time found that he could do many things independently; bathing, dressing, taking his dog for a walk, and even got a job working for the same roofing company, scheduling the crews. It wasn’t long before he and Dr. Smove felt like one unit. Mark was ready to get his own place.

This house hunt was unlike the first time he bought his house, he now required a house that accommodated both him and Dr. Smove. It wasn’t long before he had seen every one-story within driving distance of his parents. If it accommodated Mark’s needs, it didn’t accommodate Dr. Smove’s need for wide hallways and no stairs. After two months of consecutive disappointing house tours, Mark discovered that he could turn the home he liked into the home he needed. With his renovation loan he widened hallways, put in a ramp in place of the steps, installed a roll in shower in the master bath, and all without sacrificing the proximity to his family and his personal taste. Following moving day, Mark felt like Mark once more, living independently… well, him and Dr. Smoove.

 

How Could You Use A 203k Loan?

It can be difficult to find room in your budget for renovations or repair to a home you are looking to buy or one you currently own, for many people, an FHA 203k Loan is the solution.


The FHA 203k Loan is a great solution for those wanting to buy a home who can’t find one that meets their needs or one that is in disrepair. Maybe you found the perfect neighborhood but the only houses you can afford need major repairs. Or, have you found a house that you love, it’s small or outdated?  For many when buying a home, their primary concern other than finding a home is financing for their home. If the homeowner is considering renovations prior to owning the house then they would find themselves concerned with not just financing of the home itself but the renovation project as well. The FHA 203k Loan allows you to roll in the cost of the repairs or updates into the financing of the home; the total financed amount is based on the future value of the home (the home value after the repairs are made). This beauty of a mortgage, provides you with the financial backing to turn the house you like, into a home you love. Learn more about why the 203k is a better option for some than a HELOC or other home improvement loan.

The FHA 203k Loan isn’t only for those purchasing a home, your home can be refinanced with the FHA 203k as well. Just think, if you turn the home you have into the home you need or even the one you want, you won’t have to stress over house hunting. You also won’t have to pack up all your belongings, fool with selling your house, or have the weight of moving day on your shoulders. Your neighbors, your grocery store, and your routine will all stay the same—the only thing changing will be the value of your property and how much you enjoy your home. So instead of searching for a new home with a second living area, consider refinancing your home and adding a den on the back of the house. If you have always dreamed of a gourmet kitchen, upgrade your current kitchen instead of looking for a new one.

The refinance rolls the cost of the home repairs and the value of the home into one mortgage, resulting in one single monthly payment. Unlike using a credit card or personal loan, which typically have higher interest rates and shorter repayment terms, to finance your home improvement projects, refinancing with a 203k loan may lower your monthly mortgage payments and allow you a bit of breathing room with a longer repayment period. Read more about refinance and renovate options with 203k here.

Did you know? A 203k Loan can be used for home repairs due to damage caused by a disaster such as a flood, fire or tornado.

Learn more about the 203k Rehab Loan Here

We found that the FHA 203k Loan can be used to purchase a home or refinance a current one but let’s look at what the 203k loan property and renovation requirements.

The Property

  • The home must be the borrower’s primary residence.
  • It could be a single family/ standalone home, a PUD (planned unit development), a condo that meets the FHA requirements, an REO (real estate owned) also known as a bank owned home, a duplex or a fourplex.

The Renovations

The FHA 203k Loan breaks down into two options when it comes to the renovations, the Limited or the Standard.

Limited

  • Structural work is not permitted
  • Maximum of $35,000.00 in renovation costs, including fees
  • No Minimum dollar amount in repairs
  • Allowable Improvements Include:
    • Remodel a kitchen or bath
    • Repair or replace a roof (non-structural)
    • Upgrade the heating system
    • Add new windows and doors
    • Replace plumbing and much more

Standard

  • Structural work is permitted
  • Maximum is only capped by the FHA allowable loan amount
  • Minimum of $5,000 in required repairs
  • HUD Consultant required
  • Allowable Improvements Include:
    • Room additions
    • Loft conversions
    • Removal of walls
    • Kitchen or bath remodel
    • Roof replacement
    • HVAC Installation and much more

One way to think about it is, the limited limits you on the total cost of the renovations. When it comes to the Limited, there is a cap of $35,000 allowed for renovation costs, including fees, whereas, the Standard 203k does not have a cap but instead, it has a minimum requirement of $5,000 to be spent on repairs. It is for that reason that structural alterations and additions are reserved for the Standard 203k loan.

The Borrower

If your property meets the requirements and you have determined what renovations will be done then it’s time to consider what is involved in you, as the borrower, qualifying of this loan. As with anything that is being financed, a consideration of credit and down payment arises. The requirements for a borrower to receive a 203k include the following:

  • Minimum FICO Credit Score: 620
  • 5% Down Payment which can be gifted

Read more about how to get approved for a 203k.

The Contractor

The 203k does not allow for “do it yourself” style work so a contractor is required. You can learn more about why not allowing for “do it yourself” improvements benefits both you and the mortgage lender in our blog. It is your responsibility to find your contractor(s) and to work with him, her or even them to create an accurate work write-up and contract that outline the repairs/improvements along with their costs, including labor. This will allow your mortgage lender to accurately price the loan. Your contractor will need to provide the following documentation:

  • All contractors must be appropriately licensed and qualified (or utilize qualified sub-contractors) in their fields.
  • Contractors must submit, for approval; a copy of their license, proof of insurance, and a completed profile, including vendor and client referrals and a W-9.
  • Borrowers and Contractors will sign an agreement spelling out the renovation costs and process.
Once you have submitted your application you can anticipate an approximate 45-day time frame from start to close. Your loan application will include, name, purchase property address, social security number, as well as needed documentation (you can find a list of required loan documents here). From there, your application and all the documentation gets sent through the mortgage company’s internal parties; they are getting your credit score and verifying the information.

If possible, before you make an offer or write a contract, begin working on your renovation quote. We recommend it being started, and hopefully ready, prior to application.

The selection of the contractor is an important step and the decision is entirely up to you. The only requirements we have are those listed in the Contractor Requirements Section. Remember, this person will be doing the work of turning that house into your dream home, so, trusting him/ her/ them will become very important. If you are looking for a contractor after you have already submitted your loan application, you will need to select one within 4 days of submitting your application to make it to ensure the loan closes in 45 days. From there your contractor will put together the bid or work write up, laying out the work that will be done and how much it will cost.

To ensure you are moving at the right speed, the contractor’s bid/work write up should make it to your mortgage banker a week after your application submission. We need a complete and detailed work write-up or work contract of ALL repairs/ upgrades to properly calculate the total loan amount.  Once confirmed, the work contract, should be signed and dated by you and any co-borrower(s) and contractor. The calculated loan amount does not have a direct effect on the contract price but, does affect the closing costs and possible seller requested contributions. This bid/ work write up will need to contain the following information:

  • Detailed cost to renovate/repair, separated by material and labor.
  • A brief description of the work that will be performed
  • An expected completion time (to be completed in XX days from loan closing is acceptable).
  • A warranty or guaranty for the service provided.

It is important to have a well-detailed work write-up so the appraiser can clearly visualize the upgrades to the home.

Depending on the type of loan, a Limited or a Standard 203k Loan, a HUD Consultant or Project Review may be necessary, in addition to the bid/work write up. You can learn more about the difference between the limited and the standard in the Renovation Requirements Section. Once the bid/work write up is complete the loan moves along in a pretty standard way. You will sit down with your mortgage banker to review any additional documentation needs. At the same time, we will order an appraisal. The appraiser is given a window of time to complete the appraisal, typically ten business days. The accuracy of the bid/work write up including detailed repairs/upgrades and cost, is crucial to get an accurate appraisal. The appraisal will dictate what your home is estimated to be worth after the upgrades, and in turn, will dictate the maximum amount we can lend. You can learn more about appraisals here.

It’s advisable to lock the interest rate on the loan only after the work write up is complete to ensure adequate process time (45-day minimal locks are required).

The loan process becomes like any other as documents are secured, credit approval is completed, all verifications are processed. The borrower will receive TRID forms, along with all additional disclosures needed for loan completion. All contracted work begins after the loan closes. The renovation money will be held in an interest-bearing escrow reserve account and disbursed according to the terms of the renovation schedule.  Realtors, are officially ‘finished’ with their part the day we close. We will continue to work alongside the borrower and contractor, as the home is transformed! Curious how this loan got it’s start? Check out our blog post about FHA and the 203k.

Want to talk to a person about this loan? Click here!

There are a lot of myths about the 203k Loan floating around out there, let us help you separate fact from fiction. You may have heard…

…it’s hard to qualify for a 203k Loan

This is certainly untrue. The 203k Loan is an FHA (Federal Housing Administration) Loan, just with the added feature of being able to fund renovations/upgrades, so it is underwritten just like a standard FHA loan. Other than the appraisal process and the involvement of the contractor, there’s not much difference, you still have the flexible credit guidelines, the allowance in the debt-to-income ratio, and the lowered down payment.

…there is a lot of paperwork for the 203k Loan.

Let’s be honest with each other, there is a lot of paperwork involved when getting a mortgage… period. No matter what type of loan you will be asked to provide required paperwork and additional information the lender asks for. There is additional paperwork needed for the 203k loan but is it mounds and mounds more? No, not at all.

…it takes several months to close a 203k Loan.

The process to close a 203k Loan should not take any longer than 45-60 days. If you are working with an inexperienced lender, the FHA 203k or any other kind of a home loan can be a long, drawn out process. However, if you are working with an experienced 203k team and both the homebuyer and realtor do what is required the FHA 203k will run smoothly. If you are considering a 203k Loan, be sure to have a consultation with your mortgage banker at the to ensure everyone is on the same page!

… a lot of sellers won’t accept that kind of financing.

Many sellers and realtors believe that they will not be paid until the renovation project has been completed. However, this is untrue. All the renovation/upgrade work is done after closing when both the seller and realtor are paid.

In fact, it can benefit a stubborn seller or help sell a bank owned property because the home is sold “as-is” meaning, repairs don’t need to be made prior to the closing of the sale. Not even a conventional loan can offer that, with a conventional loan any health or safety violation of any kind must be fixed prior to closing.

…only FHA approved contractors can be used.

FHA approved contractors are not a real thing. The FHA does not have a list of contractors you must use or a list of those who you can’t. It’s true, you may come across contractors that advertise their experience with 203k but that does not make them a preferred or approved FHA contractor. Hiring a contractor who has gone through the process of a 203k is a good idea because he or she is familiar and can help talk through things but the FHA is not going to turn down your loan due to your choice of contractor.

FHA 203k loans are only for homes needing major repairs.

Almost all homes qualify for 203k financing except for homes built within the last 12 months. Homes in need of major work and homes with minor changes- like new cabinets or interior paint can qualify.

…horror stories about the 203k Loan.

The 203k Loan has been around for over 30 years, and has changed greatly since it was introduced. The issue is that not everyone knows about the changes and, unfortunately, some had bad experiences prior to implemented improvements. When 203k loans were first offered, there were no fraud controls in place and this loan developed a bad reputation that follows it around until this day. With the implementation of a requirement for the 203k HUD consultant, who responsibilities include making certain the correct steps are followed, borrows and lenders can rest assured they are protected from fraud.