The Federal Housing Administration (FHA) 203K mortgage loan allows home buyers to finance additional monies into their mortgage for household repairs, upgrades, or improvements. The majority of homebuyers embark on a home improvement project within 90 days of purchasing their new home. In addition to starting new home improvement projects, many new homebuyers purchase appliances shortly after buying their new home. Home improvements and new appliances can be costly and add significant financial burden to most household budgets, especially after acquiring a new mortgage. To lessen the burden of these costs, FHA created the 203k rehabilitation mortgage. This loan product is a favorable alternative for many homebuyers who intend to undertake home improvement projects or purchase appliances for their new home. Because the FHA 203K mortgage offers permanent financing, a borrower will only need to obtain one loan to finance both the purchase and rehabilitation of the property. An appraisal is completed based on the current and the projected value of the property.
The FHA rehabilitation mortgage comes in 2 basic types. The first is the regular 203K loan, which can be used for properties that have significant repairs exceeding $35,000, or if the property is in need of structural repairs (including room additions). The second type of rehabilitation mortgage is the 203K streamlined loan; this version is available for the purchase of a house in need of minor repairs, such as: painting, new air conditioner or furnace, or painting.
The maximum mortgage that is available on a 203K loan is calculated as follows: the as is value of the property plus the repair costs, or 110% of the estimated value of the property once all the repairs have been completed. An FHA appraisal would be needed for these calculations. As with all FHA loans, the down payment requirement is 3 ½%. For FHA 203K loans, the down payment is determined by the total acquisition cost (which is the sales price plus the cost of repairs).
For either the regular FHA 203K or streamlined loan product, an itemized contractors estimate is required thoroughly listing all the repairs to be completed. The contractor will need to be licensed, registered in the city where the work is to be performed, and insured. If a full 203K loan is needed, a licensed FHA consultant will be required in addition to the licensed contractor. All 203K loans will have a contingency reserve added to the mortgage to cover any unforeseen expenses during the repair or improvement phase. The contingency reserve typically adds a 10 to 20% cushion to the contractor’s estimate. This is added so there will be enough funds to complete the repairs in the event that the repairs end up costing more than the original estimate suggested. The contractor’s repair work should be completed on a 203K loan within six months after the house transfers into the borrower’s name. If the house is uninhabitable, there is also a provision which allows a borrower to roll up to six months of mortgage payments into the loan. This is to offset living expenses, if the borrower has to live elsewhere during the remodeling.
Eligible improvements for the FHA 203K mortgage programs include:
• Remodeling Kitchen and Baths
• Modernizing Plumbing, Heating, Air-Conditioning, and Electrical Systems
• Roofing, Gutters, and Downspouts
• Windows, Flooring, Tiling, and Carpeting
• Energy Conservation Improvements
• Improvements for Accessibility
• New Freestanding Appliances
• Lead-Based Paint Stabilization or Abatement of Lead-Based Paint Hazards
• Structural Alterations in Reconstruction (Full 203k only)
All health, safety, and energy conservation items must be addressed prior to completing any general improvements. Luxury improvements are not eligible under this program. Construction or additions can only be financed under the full 203K program (refer to HUD.gov for details).
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