The U.S. Federal Housing Administration (FHA) 203k renovation loan program provides buyers or refinancing households the funds for both the purchase and renovation of a home packaged into one mortgage loan.
Once the purchase of the home is closed, renovation funds are held in escrow to pay for pre-determined renovation work done by approved renovation contractors.
Overview of 203k Loans
The purchase of a house that needs repair is often a catch-22 situation because the bank won't lend the money to buy the house until the repairs are complete — and the repairs can't be done until the house has been purchased. Now that’s a predicament!
The U.S. Department of Housing and Urban Development’s (HUD) 203k program can help you overcome this obstacle by enabling you to borrow funds for the purchase or refinance of a property plus the cost of making the repairs and improvements, all in one mortgage.
The FHA-insured 203k loan is provided through approved lenders nationwide and is available to owners who will occupy the home themselves. Down payment, credit qualification, loan limits, and other requirements are the same as standard FHA loans.
Which Home Repairs Qualify for an FHA 203k Loan?
There are two main types of FHA 203k mortgage loans.
The first is the regular or standard 203k, which is given for properties that need things like structural repairs, remodeling, a new garage, or landscaping; the second is the limited or streamlined 203k, which is given for energy conservation improvements, new roofing, new appliances, or non-structural repairs such as painting.
Other repairs that an FHA 203k may cover include:
- Decks
- Patios
- Bathroom and kitchen remodels
- Flooring
- Plumbing
- New siding
- Additions to the home, such as a second story
- Heating and air conditioning systems
- And more
The program will not cover so-called “luxury” improvements such as adding a tennis court or pool to the property. It also does not cover any improvement that does not become a permanent part of the property.
Pros and Cons of 203k FHA Mortgage Loans
The main benefit of 203k loans is that they give you the ability to buy a home in need of repairs that you might not otherwise have been able to afford to buy. Plus, the down payment requirements are minimal, and often you get decent interest rates.
Note that the interest rates and discount points will vary by 203k lender, so it’s important to make sure that you’re getting a good deal on the loan.
The downsides are that not all properties qualify, there are limits on the funding you can get, and applying for the loan isn’t easy. To get the loan, you have to provide a detailed proposal of the work you want to do and cost estimates for each item. You may even need to hire an independent consultant to prepare the exhibits required.
Additionally, certain renovation projects may not be well-suited for 203k loan financing. The staggered payout structure of a 203k loan can present challenges, particularly for contractors who need to order materials upfront.
With funds being disbursed in phases rather than a lump sum, it can be difficult to secure the necessary materials at the right time, potentially causing delays and complications in the renovation process. This can lead to interruptions in the workflow and even increased costs if materials are purchased in smaller, more expensive quantities or if prices rise during the project.
Therefore, it's essential to carefully evaluate whether a 203k loan aligns with the financial demands and timeline of your specific renovation plans.
How Is My Home Value Appraised After Remodeling and Repairs?
The appraiser is given a copy of the contractor's bid documents to identify the repairs and remodeling to be done along with their costs.
The appraiser then determines the value of the home after completion, “subject to” the improvements to be made. In some cases, up to 110% of this value may be used for loan approval purposes.
How Are Loan Funds Disbursed for the Home Purchase and Renovation?
At the loan closing, funds are disbursed for the home purchase and, based on previously submitted and accepted contractor bids, renovation funds are placed by the lender in an escrow. These renovation funds are then paid in draws to the contractors as the work proceeds with final payments following inspection at completion.
The actual disbursement schedule, inspections, and paperwork required are determined by the lender for each project and must be in conformance with FHA guidelines.
Ready to Start Your Home Remodel?
Tilghman Builders is a specialist in complete home renovations and remodels in Bucks and Montgomery Counties.
Choosing Tilghman as your professional home remodel contractor ensures that no area will be overlooked. We'll walk with you through the budgeting process and also incorporate architectural planning in our Design-Build process.
To find out more about how much a home remodel costs or how long a home remodel will take, contact us today.
