The 203K Loan Program
Learn about the 203K Loan Program
(FHA Construction Loan Program)
The FHA has a financing program available, called the 203k Loan Program, which allows a consumer to purchase a home, in need of renovations, and get the cost of the repairs or updates rolled into the mortgage. The value of the home will be based on what the home will be worth after the construction is complete. The improvements can include new flooring throughout or painting and trimwork or a completely new kitchen or bathroom.
The home must meet the minimum standards of HUD and will be inspected independently for having a good roof, no structural issues, no wood rotting in the siding or soffits, running hot water, no leaking, and working heating and air-conditioning. If there are issues in some of these areas, they would also have to be addressed in order for them to approve the loan.
There are 2 versions of this loan, known as the “Streamline” (max $35K in improvements) and the “Full 203K.” Both are restricted to not exceed the current FHA loan limit, currently $291K for the value of the house and the construction combined.
The $35K Streamline loan is easier to process and only requires up front involvement from an approved inspector, but the contractor must help to temporarily fund the project (sometimes up to $20K) until all labor and material has been completed and paid for, before getting the final draw check. If you are considering this loan, make sure that your contractor is prepare to handle the cashflow issues that this can present. The maximum up front draw is usually capped to 45% of the job and the remainder will be paid upon completion. They do not permit structural changes to the home under this version of the loan. There also will be a contingency allowance held in reserve just in case any unforeseen items arise during the repair process which means that you spending limit is approximately $31,100 of total contractor services.
Under the Full version of the 203K, you can do as many repairs as desired, up to the full loan limit, with only minor limitations such as a $1,500 maximum on pool related repairs and no landscaping or fencing. Repairs must apply to the primary structure. To process this loan, the lender will require the involvement of an approved inspector throughout the entire process. It will be his job to represent the bank in verifying the appropriate levels of completion and quality workmanship, before issuance of each draw check. There will typically be 3 to 5 draws and inspections during the course of a larger remodeling project.
This is a great way for first time home buyers to create the home of their dreams in an economical way but to take advantage of the purchase of a Short-Sale, you will need to have a lender and contractor that know how to get the job done fast. When you make an offer on a short sale, the selling bank will often take months to approve your offer, but when they do, they expect you to close immediately. Many mortgage lenders and/or contractors that are not as familiar with the bank requirements for these loans will often fail to meet the deadlines and lose the opportunity. Please call us today for a referral to a worthy mortgage lender who can get the job done.