What Is The FHA 203K Construction Loan?
The FHA 203K construction or "rehab" loan enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home.
Available to both buyers and refinancing households, the 203k loan combines the traditional "home improvement" loan with a standard FHA mortgage, allowing mortgage borrowers to borrow their costs of construction.
The 203k loan comes in two varieties:
The first type of 203k loan is the Streamlined 203k. The Streamlined 203k loan is for less extensive projects and costs are limited to $35,000. The other 203k loan type is the "standard" 203k.
The Standard 203k loan is meant for projects requiring structural changes to home including moving walls, replacing plumbing, or anything else which may prohibit you from living in the home while construction is underway.
There are no loan size limits with the Standard 203k but there is a $5,000 loan size minimum.
All proceeds from the mortgage must be spent on home improvement. You may not use the 203k loan for "cash out" or any other purpose. Furthermore, the 203k mortgage may only be used on single-family homes; or homes of fewer than 4 units.
You may use the FHA 203k to convert a building of more than four units to a home of 4 units or fewer. The program is available for homes which will be owner-occupied only.
203K Loan Eligibility Standards
The 203k loan is an FHA-backed home loan and follows the eligibility standards of a standard FHA mortgage. For example, borrowers are expected to document their annual income via federal tax returns and to show a debt-to-income ratio within program limits. Borrowers must also be U.S. citizens or legal residents of the United States.
And, while there is no specific credit score required in order to qualify for the 203k rehab loan, most mortgage lenders will enforce a minimum 580 FICO. The minimum down payment requirement on a 203k rehab loan is 3.5 percent and FHA 203k homeowners can borrow up to their local FHA loan size limit. Furthermore, 203k loans are available as fixed-rate or adjustable rate loans; and loan sizes may exceed a home's after-improvement value by as much as 10%.
What Repairs Does the 203K Loan Allow?
The FHA is broad with the types of repairs permitted with a 203k loan. However, depending on the nature of the repairs, borrowers may be required to use the "standard" 203k home loan as compared to the simpler, faster Streamlined 203k.
The FHA lists several repair types which require the standard 203k:
- Structural alterations and reconstruction
- Modernization and improvements to the home's function
- Elimination of health and safety hazards
- Changes that improve appearance and eliminate obsolescence
- Reconditioning or replacing plumbing; installing a well and/or septic system
- Adding or replacing roofing, gutters, and downspouts
- Adding or replacing floors and/or floor treatments
- Major landscape work and site improvements
- Enhancing accessibility for a disabled person
- Making energy conservation improvements
- Total repairs exceeding $35,000
For most other home improvement projects, borrowers should look to the FHA Streamlined 203k . The FHA Streamlined 203k requires less paperwork as compared to a standard 203k and can be a simpler loan to manage.
A partial list of projects well-suited for the Streamlined 203k program include:
- HVAC repair or replacement
- Roof repair or replacement
- Home accessibility improvements for disabled persons
- Minor remodeling, which does not require structural repair
- Basement finishing, which does not require structural repair
- Exterior patio or porch addition, repair or replacement
Borrowers can also use the Streamlined 203k loan for window and siding replacement; interior and exterior painting; and, home weatherization.
Still have questions about FHA 203K Renovation Mortgages? Speak with one of our loan officers directly at (833) EHL-1234.