A Guide to Renovation/Rehab

Who qualifies for an FHA 203k?

Generally, most people who qualify for a standard FHA loan can qualify for a 203k loan, provided the 203k loan amount isn’t significantly higher than the buyer’s original pre-approval. The lender may charge a higher interest rate or higher fees for the 203k loan, so make sure with your loan professional that you still qualify.

The general process:

1. The buyer finds a home they like, but it needs some work.

2. The buyer talks to their lender about the FHA 203k. Although they were pre-approved for regular FHA or conventional financing, they most likely need to be re-approved for a 203k loan. The lenderl issues another pre-approval based on the estimated purchase price and repair costs, plus other 203k-related fees.

3. Offer is written 

4. The buyer will need to  find an approved  contractor to write up a quote of all repairs. When the quote is complete, the buyer and lender will receive a copy. The contractor may not be a family member.

5. An appraisal is ordered, which will reflect the future appraised value of the home. The final bid is used by the appraiser to determine what the home will be worth once all work is complete.

6. The lender submits the bid, appraisal, and all borrower income, credit, and asset documentation to underwriting.

7. The underwriter issues an approval, usually with conditions needed from the buyer and the contractor.

8. Once all conditions are received, the buyer signs final loan documents. The lender funds the loan. Part of the loan funds are put into an escrow account, which holds the money for the repairs.

9. 50% of the repair costs are issued to the contractor up front. The other 50% will be paid to the contractor when all work is complete.

10. The contractor has six months to complete the work.

11. When the work is complete, the remaining repair costs are issued to the contractor.

12. The escrow account is closed out. The buyer has a home that is 100% complete, and one loan with one interest rate that covers the original purchase price and all repair costs.

What is a Renovation loan?

A renovation loan allows a borrower to secure financing for BOTH:

• The purchase of the house. 

• The cost of renovating the home.

ALL IN ONE LOAN, based on future value after improvements!

There are 4 basic products:

• FHA 203K - Limited - up to 35k in renovation

• FHA 203K - FULL - Larger renovations

• Fanny Mae Homepath - Conventional product 

• VA Rehab 

Homebuyers can:

• Buy a less-than-perfect home in a great location and turn it into a dream home.

• Eliminate property problems sooner rather than later.

• Expand a home to meet their needs.

Current homeowners can:

• Enhance the equity in their current home by making valuable improvements.

• Upgrade, add on, and remodel without tapping into savings accounts.

What properties are a good fit? 

• REO properties

  • Bank foreclosures

  • FHA, VA, and Fannie/Freddie inventory

  • Auctions

  • Tax sales

  • FSBOs

  • Estates

  • Your own inventory

What is a FHA 203 K? 

Section 203(k) programs are the HUD’s primary programs for rehabilitation of 1-4 unit owner-occupied properties.

What properties are eligible?

• Most owner-occupied 1-4 family properties.

• Excellent for HUD-owned and bank REOs.

• Condos

• Purchase or refinance.

• Property must be 100% complete per Certificate of Occupancy or equivalent document and must be over 1 year old.

• 30-year fixed.

• Credit underwriting guidelines are the same as for any FHA loan:

  • 640 mid score/max 50% DTI.

  • 1-2 units, no reserves, 3 months on 3-4 units

  • Owner-occupied (only for now)

  • No cash out or debt consolidation.

Ineligible Repairs

Luxury items not allowed, including:

• New tennis court

• Gazebo or bath house

• Additions to provide to commercial use

• Photo mural

• Television antenna or satellite dish

• New swimming pool

• Outdoor fireplace/hearth/barbeque pit

Eligible Repairs

• Structural alterations and additions

• Install or repair roofing/gutters/downspout

• Garage (attached/detached/new)

• Install flooring/tile/carpet

• Remodel kitchen or bathroom

• Energy conservation improvements

• Install appliances

• Major landscaping/decks/fencing

• Changes to eliminate deterioration 

• and reduce maintenance

• Improvements for accessibility (handicap access)

• Repair swimming pool (up to $1500)

• Interior and exterior painting

• Modernize plumbing/heating/air conditioning/electrical systems

• Improvements must be permanently affixed to the property and add value (appliances are OK, even though not permanent)

• Install or repair well/septic system

FHA 203K Limited:

• No consultant required.

• $35,000 maximum renovation cost (bid, contingency reserve, etc.) and supported by 110% of after-improved appraised value.

• 2 work escrow disbursements, 50% at closing, then 50% upon completion.

• No structural renovations allowed

• Cosmetic repairs in nature.

203(k) Limited: Eligible Repairs

• Repair or replace or upgrade: roofs, gutters, and downspouts, existing HVAC systems, plumbing and electrical systems, existing flooring.

• Minor remodeling (non-structural) repairs.

• Exterior and Interior painting.

• Weatherization.

• Appliances including free-standing ranges, refrigerators, washers/dryers, dishwashers, and microwaves.

• Improvements for accessibility for persons with disabilities.

• Environmental mitigation.

• Lead-based paint abatement.

• Repair/replace exterior decks, patios, porches. (that does not require footings).

• Basement finishing and remodeling (not involving structural repairs)

• Window and door replacement and exterior wall residing.

• Septic systems and/or well repair or replacement.

• Kitchen and bath remodel (not structural)

203(k) Limited: Ineligible Repairs

• Major rehabilitation or remodeling (such as the relocation of a load-bearing wall).

• New construction and room additions.

• Repair of structural damage.

• Repairs requiring detailed drawings or architectural exhibits.

• Landscaping or similar site amenity improvements.

• Any repair or improvements requiring more than 6 months to complete.

• Rehabilitation activities that require more than 2 payments per specialized contractors.

• Work that would cause the borrower to be displaced from the property for more than 30 days during the time of rehabilitation.

Homebuyers using the full 203k loan must work closely with a HUD accepted 203k consultant.

An initial site visit will be planned so the consultant can get a scope of the work you would like to complete on your home and the feasibility of the project.  If he agrees the work is feasible you enter a contract with the consultant. There is a fee paid to the consultant based on the size of the project.

From there the consultant will prepare a detailed document including architectural renderings and detailed cost estimates and submit to the borrower, lender and contractors.

Contractor choice is absolutely up to the buyer but they do need to be approved by the consultant and abide by the FHA guidelines.  Once your package is submitted and approved you can close on your home and get started on the work.

The consultant will do site visits to make sure certain work is complete before the contractors are paid, as well as prepare a final punch list to complete the project.

PROS AND CONS OF AN FHA 203K REHAB LOAN

There are a lot of benefits to the FHA 203k Rehab loan, but some downsides as well.

Pros of an FHA 203K

• No equity needed in the home

• 3.5% minimum down payment

• One loan for purchase and repairs

• Mortgage is assumable

CONS OF AN FHA 203K

• Homeowners can’t do their own work

• Contractors must be lender approved

• Not available to investors

• More paperwork work than a regular mortgage

What is a Fannie Mae HomeStyle® Renovation Mortgage?

A HomeStyle® Renovation Mortgage allows you to finance home improvements with 

your home purchase—

ALL IN ONE LOAN!