203(k) Program Overview

Loan Info:  An important tool for community and neighborhood revitalization, the FHA 203(k) loan offers flexible qualifying and low downpayments: 

• FHA downpayment (3%)
• Flexible credit qualifying
• Assumable loans
• Finance up to 6 months of mortgage payments
• Purchase or Refinance and Improve all in one loan

The 203(k) loan program offers borrowers the resources to rehabilitate a home that may be in need of repair, either the home that they currently live in, or that special fixer-upper opportunity. One single loan is used to pay for the purchase (or refinance) and the cost of renovating the home.

Made available to certain lenders by the U.S. Department of Housing and Urban Development (HUD), the FHA 203(k) program has already provided many buyers with the funds necessary to buy their first home, or greatly improve a move-up home. The FHA 203(k) loan is available to borrowers of all income levels, to homeowners who plan to occupy the house, and for homes with one to four units.

Types of 203(k) Loans: 
30 or 15 year fixed rates
One year ARM

Assumable to a qualified buyer, with no money down
For complete set of rules and official government information on the 203(K) loan program please visit the HUD website.

203(k) Requirements

ELIGIBLE PROPERTIES:

One to Four Family Properties:

All types. Must be owner-occupied.

One to four family residential homes, which have been completed for at least one year.

Homes that have been demolished or razed as part of the rehabilitation process are eligible as long as the existing foundation system remains intact.

Any property that the buyer wishes to convert. (ie.. a single family property into a two to four family property, or a two to four family property into a single family property, etc.)

A manufactured home that was built after June 15,1976, and has been on a permanent foundation for over one year is eligible, plus the unit must have been delivered to the site when it was new, prior to being occupied. 

Condominiums:
All improvements are required to be inside the condo
Must be owner-occupied

ELIGIBLE STRUCTURAL ALTERATION & RECONSTRUCTION:

The following items have been designated by HUD as eligible structural alterations and reconstruction for use of a 203(k) loan. Since each house and its conditions vary, your project may not require each exhibit listed below. You should indicate to your Consultant the scope of what you wish your project to entail and allow the Consultant to advise you as to the exhibits that your specific project will require.

Wood Destroying Insect Report (Including all outbuildings and accessory structures)
Well and or Septic Report (If applicable)
Home Inspection Report
From a qualified Architectural, Engineering, or Home Inspection Service. The Consultant can perform the Home Inspection function if qualified to do so and has no identity-of-interest in the property. This function is separate from the Consultant role.
Proposed Plot Plans for New Additions
Required by the lender and the municipality in which the home is located. The drawings must depict the scope of the addition to the lender and be submitted to the local enforcing agency for construction permit approval.
Proposed Floor Plans
(Drawings that indicate where wall changes will occur)
Other Exhibits as necessary
(i.e., cabinetry plans and elevations, new construction exhibits required to obtain permits, grading and drainage plan)
Work Writeup and Cost Estimate
A description of the work to be performed and a detailed cost estimate

Miscellaneous Guidelines:
All properties must be at least one year old
New construction is not eligible
Commercial properties are not eligible
Required $5,000 minimum renovation cost

Mixed-Use Properties:
All improvements are required to be made to residential portion only
Must be owner-occupied
Storefronts are eligible
The commercial property must not affect the health and safety of the residential occupants.
The floor space used for commercial purposes must not exceed:
1) 25% for a one story building
2) 33% for a three story building
3) 49% for a two-story building

ELIGIBLE BORROWERS:
Owner Occupants - Purchase - Refinance
Non- Profits
Investors NOT allowed

There is a minimum requirement of $5,000 in eligible (necessary) improvements on the subject property. Improvements to a detached garage, a new detached garage, or the addition of an attached unit (if allowed by local zoning ordinances) can also be included in this first $5,000. * The look a likes has no minimum amount of rehab / renovation.

The mortgage must include one or more of the items listed below:
Structural repairs and alterations.
Items such as additions to the structure; repairing any and all structural damage.
Improvement in the functionality or modernization.
Such items as remodeled kitchens and bathrooms.
Changes for aesthetic appeal, and the elimination of obsolescence.
New exterior siding and new doors.
Repair of replacement of plumbing, heating, air conditioning or electrical system. Installation of new plumbing fixtures are acceptable, including interior whirlpool bathtubs.
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 tiling.
Energy conservation improvement.
New dual pane windows and doors, storm windows, 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 the cost, or that are needed to preserve the property from erosion.
Improvements for easier accessibility to the handicapped.
Handicapped retrofitting can be included in the cost of rehab. This is particularly good to get this information into the hands of vocational rehab companies and companies that deal with disabilities. They may have a list of clients for you.
The following items can be included in addition to the minimum $5,000 requirements:
New cooking ranges, refrigerators and other stand alone appliances.
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.

What are FHA 203K Home Improvement / Remodeling Loans?

The FHA 203K Home Improvement Loans / Remodeling Loans are a fully disbursed loan 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 FHA 203K Home Improvement Loans / Remodeling Loans 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.

FHA 203(k) Home Improvement Loans / Remodeling Loans Advantages
Non-profit organizations are eligible with only 5% down payment and can buy multiple properties
Finance up to 6 months mortgage payments
Special HUD down payment programs
Most closing costs can be financed
An FHA loan is assumable

Things You Can Do With The FHA 203(k) Home Improvement Loans / Remodeling Loans
Mixed Use properties - You can renovate a mixed use property provided the commercial space represents less than one floor of the structure. The commercial uses cannot affect the health and safety of the occupants.
Home buyers and non-profits who purchase HUD-Owned properties can refinance the property using the 203(k) within six (6) months of the purchase, the same as if the buyer purchased the property with a 203(k) insured loan to begin with.
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.
Non-profits can purchase a property, rehabilitate it and sell it or keep it. If the non-profit intends to keep the property as a rental then they should keep the acquisition and rehab costs at the lowest possible number to increase the cash flow.
If the non-profit sells the property they can take advantage of an unique aspect of this program alled the "escrow commitment procedure" which allow them to secure a loan based on the "after improved" value of the property. Once a buyer is located that qualifies the non-profit is relieved of liability on that loan since it is fully assumable and the buyer takes over the mortgage. The buyer comes up with a 5% down payment that can be borrowed from the non-profit or anyone else to complete the transaction. If the buyer takes a second with the seller then it must be a five year note or longer. The non-profit may chose to forgive the second or collect it but in either case the non-profit has received 95% of their money up front. It has been setting in an escrow account since the original loan was funded drawing interest in the non-profits name.

203(k) Consultant Process

Step #1
Site Visit

• Consultant meets with the borrower at the site.
• A general examination of the work to be done determines if the project is feasible.
• If feasible, Client signs Consultant Agreement and pays Consultant fee (see fee chart below).

Step #2
Consultant prepares Work Write-Up

• Clear, concise project specifications
• Construction cost analysis
• HUD required draw request forms
• Preparation of contractor bid packages
• Preparation of lender packages

Step #3
Consultant delivers the Work Write-Up

• Borrower
• Lender
• Contractor  

Step #4
Selection of a Contractor by the Borrower

• The Borrower selects a contractor. Borrowers should be aware that many lenders may have contractor qualification criteria. Some lenders maintain a list of contractors that have met their qualification criteria.
• Discuss contractor selection with your lender to learn about their contractor requirements. If you’re considering a contractor which has not yet been approved by your lender or has never done a 203(k), it is important that they are informed early on about the 203(k) concept as it applies to contractors.

Step #5

• Loan Closes
• Repair funds are placed in escrow
• Remodeling begins

Step #6
Consultant Performs Draw Request Inspections

• 1st Draw - Consultant insures permits were issued.
• 2nd and 3rd Draw - Draw request inspections are performed as work progresses.
• 4th Draw - A punch list is established.
• 5th Draw - The project is closed out and warranties and lien releases collected.

203(k) Consultant Fee Schedule

REPAIR AMOUNT CONSULTANT FEE $5,000-7,500 $400 $7,501-15,000 $500 $15,001-30,000 $600 $30,001-50,000 $700 $50,001-75,000 $800 $75,001 -100,000 $900 $100,000 and up $1,000 (fees are established by HUD)