FHA 203(k) Loans FAQ's
203k Consultant Services
The Federal Housing Administration (FHA) has created a loan program that allows a buyer to purchase an existing home or refinance their current one with a minimum down payment and include funding for improvements and renovations; it is called an FHA 203k Loan. For those potential buyers, lenders and realtors interested in taking advantage of the program, the following information will be helpful in understanding the role of the FHA 203k Loan Consultant.
203k Advantages
The 203k loan can be used to purchase a home in any neighborhood or condition. The “Full 203k” program can be used for renovations or additions in excess of $35,000 up to the maximum loan amount which is currently over $700,000 . The “Streamlined” version of the 203k may be an option for your project. In general, you must have work done that is more than $5,000 and does not exceed $35,000 in repairs. Those repairs have to be for simple things like carpet, roofing, paint, cabinets, minor repairs, new windows, etc. There can be no structural issues or changes to the project that require blueprints.
Can the 203k program be used on only single-family homes?
This program is eligible for use on owner occupied single family homes as well as 1 to 4 unit buildings; including the conversion of a building from a larger number of units down to 4 or less. Following specific guidelines, the 203k mortgage can also be used on a condominium unit for improvement of the interior only.
Can a 203k be used to purchase a HUD-owned property?
A 203k loan can be used to purchase a HUD-owned property that is determined by HUD to be eligible for a 203k.
Is the 203k program allowed for use by investors?
A 203k loan can be used only by owner occupants, local governments or eligible non-profits. However, an owner occupant can use a 203k loan to purchase and renovate up to a 4-unit building as well as multi-use building in conformance with certain guidelines.
How are loan funds disbursed for the 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 in conformance with FHA guidelines. No funds are released at the time of closing.
Is a borrower allowed to do the rehabilitation work?
While this is allowed under FHA and Fannie Mae’s guidelines, most lenders do not allow “self help.” This ruling was put into place to mitigate the risk associated with the loan.
What if there are extra funds after renovation?
Any funds left over following completion of the renovation can be used to make additional allowable improvements to the property. If not used for this purpose, left over funds will be applied to pay down the principal balance of the mortgage.
Is there a time limit for the renovation?
The renovation must begin within 30 days of the closing of the loan and must be completed within the time frame established in the loan agreement. The total time for renovation must not exceed 140 days.
What if the home is not habitable during renovation?
The Standard 203k loan does allow for up to three mortgage payments to be included in the renovation funds to cover the period when the home is uninhabitable during renovation. The habitability status of the home is determined by the 203k consultant. A Streamline 203k, however, cannot be used if the home will not be habitable at any time during the renovation.
Do I need a 203k Consultant for my project?
If you are using the full version of the FHA 203k loan than the answer is yes. The full version will be used when structural issues such as foundation repairs are involved or when the total renovation amount exceeds $35,000.00.
What is a contingency fund and why is it added to my renovation amount?
The contingency will range from 10% – 20% of the amount of the bid. These funds are collected along with the amount listed on the bid from your general contractor and kept in escrow should something unexpected happen along the way. Should your general contractor need the funds they will file a change order and upon review the lender will release the funds. If nothing unexpected occurs and you are nearing the end of the project it may be possible to use the funds for elective items.
The Federal Housing Administration (FHA) has created a loan program that allows a buyer to purchase an existing home or refinance their current one with a minimum down payment and include funding for improvements and renovations; it is called an FHA 203k Loan. For those potential buyers, lenders and realtors interested in taking advantage of the program, the following information will be helpful in understanding the role of the FHA 203k Loan Consultant.
203k Advantages
The 203k loan can be used to purchase a home in any neighborhood or condition. The “Full 203k” program can be used for renovations or additions in excess of $35,000 up to the maximum loan amount which is currently over $700,000 . The “Streamlined” version of the 203k may be an option for your project. In general, you must have work done that is more than $5,000 and does not exceed $35,000 in repairs. Those repairs have to be for simple things like carpet, roofing, paint, cabinets, minor repairs, new windows, etc. There can be no structural issues or changes to the project that require blueprints.
Can the 203k program be used on only single-family homes?
This program is eligible for use on owner occupied single family homes as well as 1 to 4 unit buildings; including the conversion of a building from a larger number of units down to 4 or less. Following specific guidelines, the 203k mortgage can also be used on a condominium unit for improvement of the interior only.
Can a 203k be used to purchase a HUD-owned property?
A 203k loan can be used to purchase a HUD-owned property that is determined by HUD to be eligible for a 203k.
Is the 203k program allowed for use by investors?
A 203k loan can be used only by owner occupants, local governments or eligible non-profits. However, an owner occupant can use a 203k loan to purchase and renovate up to a 4-unit building as well as multi-use building in conformance with certain guidelines.
How are loan funds disbursed for the 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 in conformance with FHA guidelines. No funds are released at the time of closing.
Is a borrower allowed to do the rehabilitation work?
While this is allowed under FHA and Fannie Mae’s guidelines, most lenders do not allow “self help.” This ruling was put into place to mitigate the risk associated with the loan.
What if there are extra funds after renovation?
Any funds left over following completion of the renovation can be used to make additional allowable improvements to the property. If not used for this purpose, left over funds will be applied to pay down the principal balance of the mortgage.
Is there a time limit for the renovation?
The renovation must begin within 30 days of the closing of the loan and must be completed within the time frame established in the loan agreement. The total time for renovation must not exceed 140 days.
What if the home is not habitable during renovation?
The Standard 203k loan does allow for up to three mortgage payments to be included in the renovation funds to cover the period when the home is uninhabitable during renovation. The habitability status of the home is determined by the 203k consultant. A Streamline 203k, however, cannot be used if the home will not be habitable at any time during the renovation.
Do I need a 203k Consultant for my project?
If you are using the full version of the FHA 203k loan than the answer is yes. The full version will be used when structural issues such as foundation repairs are involved or when the total renovation amount exceeds $35,000.00.
What is a contingency fund and why is it added to my renovation amount?
The contingency will range from 10% – 20% of the amount of the bid. These funds are collected along with the amount listed on the bid from your general contractor and kept in escrow should something unexpected happen along the way. Should your general contractor need the funds they will file a change order and upon review the lender will release the funds. If nothing unexpected occurs and you are nearing the end of the project it may be possible to use the funds for elective items.