Takeaways
- This is one of your only options if you want to finance repairs into your loan
- You probably don’t want to do the FHA 203K if you can avoid it
- You can also use the program to refinance a renovation on your current home
The most common FHA Loan is the 203B, offering a minimum downpayment of 3.5% and more generous allowed debt-to-income ratios than conventional loans.
But another type of FHA Loan – the 203K – allows you to finance in repairs into the cost of the loan. It is one of the only loan types that does so.
“Amazing!” You might be thinking. “Why doesn’t everyone use this?” Actually, we will discuss some good reasons for which you probably want to avoid the 203K. It is a very rare loan type in the Fort Hood, TX area – in part because homes tend to be newer and in good condition.
But we also have our own challenges with hailstorm-damaged roofs, expansive clay soils that wreck foundations, and conditions favorable to termites and carpenter ants. It may be the case that the 203K is necessary to get the home of your dreams, and get it into shape!
Benefits of the FHA 203K Loan
Finance the Repairs
The FHA 203K program enables borrowers to purchase their home while financing major rehabilitation (at least $5000) or other improvements into the same loan. The loan covers not only the cost of the property but also the cost of necessary home repairs. A HUD consultant is required when doing a full 203K loan.
Successfully Navigate Lender Required Repairs
The FHA 203K can be particularly helpful if there is a major, lender required repair that the seller is unable to fix themselves. You can still close the deal, and finance that repair cost into the loan.
Refinance a Renovation
You can also use the FHA 203K to refinance your current home while improving or making a major necessary repair.
Don’t Pay Until You Move In
The first six mortgage payments can also be financed, which means you aren’t paying mortgage payments on a house that is under repair and not yet ready for moving in.
Drawbacks of the FHA 203K Loan
Challenging
They are very difficult and time-consuming loan types. Many lenders do not offer them at all, for that reason. There are a lot of moving parts.
Higher credit scores required
Unlike normal FHA 203B loans, which can often be used by borrowers with lower credit scores (generally 580 for a 3.5% downpayment), the 203K is generally only available to buyers with at least a 640 credit score.
Higher Interest Rates
Because 203K loans are a pain in the caboose, lenders often charge a premium interest rate on the loan.
Long Closing Timeline
The intricacies and novelty of the 203K Loan probably mean most folks part of the transaction aren’t very experience with it, and there will be bumps in the road to closing. Depending on the circumstances, sellers may look less favorably on your loan type than another offer.
Risk and Strict Timelines
If things go wrong with the timelines, cost estimates or contractors after closing – tough cookies. It’s your home now. You are accepting some amount of risk by closing on a home with significant repairs required.
Streamlined FHA 203K Loan
The streamlined 203K has no minimum amount, but a maximum amount of $35,000 in repairs. The repairs cannot be structural. A HUD consultant is not required.
| Full | Streamlined | |
|---|---|---|
| Minimum Repairs | $5000 | No minimum |
| Max Repairs | Up to 110% Loan-To-Value (LTV) according to appraiser | $35,000 |
| Repair Type | Structural and non-structural | Non-structural only |
| # Contractor Draws | 5 (determined by HUD Consulant) | 2 (1 at 50%, 1 at completion) |
| Contingency Reserve | 15% minimum (determined by HUD Consultant) | 10% (15% if vacant/foreclosure) |
| HUD Consultant | Required | Not Required |
| Repair Money at Closing | No upfront money is given | May receive half of repair cost at closing |
Example Renovations
- Home Additions
- Repairing the foundation
- Upgrading or replacing the HVAC
- Repair Termite Damage
- Rehabbing a property with asbestos or lead based paint
- Remodeling
- Installing a well or septic system
- Repairing the roof and gutters
- Replacing flooring, tiling and carpets
- Painting
- Green energy improvements
- Major landscaping
- Improvements for ADA projects
Improvements that are not attached to the property, serve business or commercial purposes, or are “luxury” items (e.g. pools, gazebos and barbecue pits) are not allowed.
Process
- Buyer gets preappoval from a 203K participating lender
- Buyer makes and offer and gets under contract on a home
- Buyer gets estimates from licensed contractors on the repairs
- Buyer/lender get a HUD Consultant assigned if applicable
- Buyer/HUD Consultant agree on estimate and scope of work
- Lender orders the appraisal
- 92-700 Maximum Mortgage Worksheet is completed based on appraisal, determining full loan amount
- Lender submits package to underwriter for approval
- Once approved, buyer and seller close on the home
- Repairs are completed
Contractors may start work immediately, only after the home has closed and funded.
Within six months of closing, all the work will be complete. When the work is complete, buyer and HUD Consultant will inspect and approve the results, and the final funds can be disbursed to the contractors. Any funds not used will be applied to the principal on the loan, not go to the buyer.
Frequently Asked Questions (FAQ)
Can you purchase a foreclosure needing repairs with an FHA 203K Loan?
Yes.
Can you use the FHA 203K Loan to make improvements to the house, such as add an expansion or renovate a kitchen?
Yes.
Can I use the FHA 203K for investor properties?
No. Owner occupied homes only, just like a normal FHA 203B Loan.
Can I use it for multi-family properties?
You can use it with duplexes, but not triplexes or fourplexes.
Can I use it to purchase a mobile home?
No.
Who chooses the repairman or contractor?
The buyer does. The lender must review and approve the contractor, and the contractor must have all applicable State licenses for the type of job. The contractor must also provide a complete and itemized estimate for the work.
How much can I borrow toward repairs?
For a full 203K loan, there is no maximum (Streamlined has a $35,000 limit). However the total, plus the purchase price, must be less than the repaired value of the home according to the lender’s appraiser.
Conclusion
The 203K is mostly useful if you have a property with major repair issues wrong, but that you’ve just gotta have. That probably doesn’t describe most properties in the Fort Hood area, but it is great to have this option as a backup depending on the situation.
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