What is a 203k loan?
FHA has been around for a long time and if you have ever heard of an FHA loan you were likely hearing about the 203b loan. The 203k is just a little farther down in Section 203.
The 203k loan is a fully disbursed loan at closing which allows a borrower to purchase or refinance a property and finance the cost of rehabilitation with one loan. Because it is fully disbursed at closing, the 203k loan can be insured by HUD as soon as the loan closes.
The mortgage amount for these loans is based on the projected value of the property with the work completed, taking into account the cost of the work. HUD has taken a strong position to encourage this program and the loan is now easier to originate and close than ever before.
Use a consultant. A 203k loan can close as fast as the lender can close a 203b loan.
• Up-front MIP can be financed – all FHA loans have MIP
• Non-profit organizations are eligible with only 5% down payment
and can buy multiple properties
• You can finance up to 6 months mortgage payments *
• Special HUD down payment programs
• Most closing costs can be financed
• FHA loans are assumable
* during the period when you can’t live there due to construction
We consider every 203k a streamlined “k” when it has construction costs plus fees under $35,000 and they consist of simple or non-complex construction items…no structural work including room additions. There is no minimum amount of work to qualify for a Streamlined “k”.
The consultant is brought in as a Plan Reviewer to ensure the lender that the contractor bid covers all of the “necessary” items required by the 203k Program. In addition, the consultant will prepare all the necessary contracts and disclosures so the lender has all that paperwork to add to their 203b paperwork and turn in. Most common problem is that you fail to include all necessary health & safety issues.
Streamlined “k” means NO STRUCTURAL WORK NEEDED
• Home buyers that purchase a home can refinance the property using the 203k within six (6) months of the original purchase, the same as if the buyer purchased the property with a 203k insured loan, to begin with. You get to count the money you originally put down as if it were in this new transaction. Bring your HUD-1 from the other purchase.
• The borrower will be eligible as a first time home buyer without the three-year waiting period if they are legally separated or divorced, even if they had an interest in a home with their spouse, provided the individual no longer has an interest in the home.
There is a minimum requirement of $5,000 in eligible (necessary) Improvements on the subject property for a Full 203k. Improvements to a garage, a new garage, a room addition or an attached unit (if allowed by local zoning ordinances) can also be included in this first $5,000. The Streamlined “k” has no minimum amount of rehab. The Full 203k mortgage must include one or more of the items listed below:
• Structural repairs and alterations.
• Items such room additions; repairing any and all structural damage.
• Improvement in the functionality or modernization.
• Remodeled kitchens and bathrooms.
• Changes for aesthetic appeal, and the elimination of obsolescence.
• New exterior siding and new doors.
• Repair or replacement of plumbing, heating, air conditioning or electrical system.
• Installation of Well and/or Septic System. Must be installed or repaired prior to beginning any other repairs to the property. Properties less than one acre in size can be limited on this item.
• Replacement of flooring, carpeting or tile.
• Energy conservation improvements.
• New dual pane windows, storm windows, doors, insulation, and solar domestic hot water systems.
• Major landscape work and site improvement.
• Patios and terraces that improve the value of the property equal to their cost, or that are needed to preserve the property from erosion.
• Improvements for accessibility to the handicapped. Handicapped retrofitting can be included in the cost of rehab.
• New cooking ranges, refrigerators, and other stand-alone appliances can be included in addition to the minimum $5,000 requirements.
• Painting and other cosmetic repairs.
• Fencing, new walks and driveways, and general landscape work trees, shrubs or seeding).
• Repair of an existing swimming pool, up to $1,500. Any costs exceeding $1,500 must be paid into the Contingency Reserve by the borrower.
NOTE: Items that will not become a permanent part of the property are not eligible. Luxury items are not eligible. These items include, but are not limited to New swimming pools, exterior hot tubs, saunas, spas, tennis courts, and barbecue pits.
1. Any single-family home up to a four-unit property that will be owner occupied and has been completed (with a certificate of occupancy) for at least one year that is acceptable according to the provisions of local zoning requirements.
2. Homes that have been demolished or razed as a part of the rehabilitation process can be rehabbed as long as the existing foundation system is not affected and remains intact. (As long as there is a portion of the original foundation)
3. A home can be moved onto a foundation on the mortgaged property, provided the proceeds from the sale of the previous location are not released until the foundation is properly inspected and the home is satisfactorily attached to the new foundation. Must be HUD inspected before and after the move. Must move from original position to new site.
4. Any property the buyer wishes to convert either from single family into a two to four family property or from a two to four family dwelling into a single family unit. Let’s take this one a little farther – You can take a 5-8 plex and turn it into a 1-4 unit property. Turn an 8-plex into a 4-plex.
5. A manufactured home that was built AFTER June 15, 1976, and has been on a permanent foundation for over one year is eligible, provided the unit must have been
delivered to the site when it was new, prior to being occupied. Install a new manufactured home to replace an existing manufactured home provided it is on a permanent foundation.
6. A 203k can be used on a “mixed use residential property” provided it meets the following requirements: The floor space used for commercial purposes does not
25% for a one-story building
33% for a three-story building
49% for a two-story building
• The commercial use must not affect the health and safety of the residential
• The rehabilitation funds will only be used for the residential functions of the
• dwelling and areas used to access the residential part of the property.
7. Condominiums are eligible with the same restrictions as an FHA loan.