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What is an FHA 203(k) Loan?

If you're a homebuyer who has found your dream home, but it needs to be remodeled or repaired, an FHA 203(k) home loan from New American Funding might be able to help you. An FHA 203(k) loan is designed to service borrowers with less than-perfect-credit to use to renovate or repair a property that they want to purchase. It can be used for minor projects and major ones, including the complete demolition and rebuilding of a property.

FHA 203k Loan Overview

home improvement loan

FHA loans are home loans that are offered and insured by the Federal Housing Administration. These government-backed loans originated in the United States in 1934 as a resource for homebuyers with potentially limiting credit concerns buy homes. However, as time has passed, they’ve become increasingly popular with a wider group of borrowers, including first-time homebuyers.

FHA 203(k) loans are a type of FHA loan that are also known as home improvement loans. An FHA 203(k) loan allows you to combine your renovation costs into your mortgage so there is one loan with one closing. The amount borrowed is a combination of the cost of the home and the estimated price of the repairs, including the labor expenses. They have the same basic requirements and qualifications of general FHA loans, plus some additional ones specific to both the loan type and the individual lender.

What Projects Can You Use an FHA 203(k) Loan For?

There are many types of projects that you can use an FHA 203(k) loan. You can use them for most needed repairs or renovations that improve the functionality of or increase the value of your property. You can update or replace existing features and even tear your property down to the foundations and rebuild it.

These projects can include:

  • Things that improve the safety of your home – removing lead-based paint, waterproofing, restoring windows or doors, weather proofing and insulation upgrades, roofing repairs or upgrades
  • Structural upgrades and repairs – Building or repairing decks, patios, and porches, installing or repairing heating and air conditioning systems, finishing a basement, updating the plumbing and electrical systems
  • Energy efficient upgrades
  • Projects that will increase the value of your home – appliance upgrades, remodeling your kitchen or bathroom, installing carpet, tile, or wood flooring, building a home addition, certain landscape projects
  • Improving accessibility for persons with disabilities – adding wheelchair ramps, installing a stair lift, installing handrails, adding more lighting

This is not an exhaustive list and you should always check with your lender to see if the repair project or upgrade you have in mind will be covered by your loan agreement. There are many projects that are not covered that are considered luxury additions like swimming pools.

Types of properties that qualify:

  • A one-to-four family home that has been complete for at least a year
  • A home that has been torn down as long as some of the existing foundation still remains
  • A home that may need to be moved to a new location
  • Some condos

Your home improvement project will need to be completed within six months, and the funds will be put in an escrow account to be paid out to the contractors upon completion. The improvements or upgrades will also need to be performed by professionally licensed contractors.

On top of being FHA-approved, applicants for an FHA 203(k) loan will need to meet minimum credit score and employment history requirements. Bankruptcies have a two-year seasoning requirement from discharge and foreclosures require three years of seasoning. Generally, a two-year history of income documentation is required to meet FHA requirements.

The 203(k) loan is available as a fixed-rate mortgage. Since there are different variables with each of these loans, it’s always a good idea to consult a 203(k) loan officer regarding your specific housing situation.

Types of FHA 203(k) Loans

  • For many people, buying distressed or dilapidated homes can be a good investment in homeownership. However, home repair and renovations can be costly. The FHA offers two types of 203(k) loans to meet your unique property needs.

    FHA 203(k) Limited (Streamline) Loan

    The Limited 203(k) loan is intended for less expensive projects that don’t involve structural improvements. It has a maximum repair limit of $35,000.

    • Good for homes that need renovations (not major structural repairs)
    • Can cover mortgage payments during home repairs
    • Offers low credit score requirements and down payments
    • Can be used for energy efficient upgrades

    FHA 203(k) Standard Loan

    The Standard 203(k) loan has a minimum requirement of $5,000 in renovation costs and covers structural repairs. It is designed for buyers who want to add major upgrades or need extensive repairs done to the property. There is no maximum repair limit as long as the entire loan is below FHA’s maximum loan amount for the region. 

    • Good for homes that need renovations including major structural repairs
    • Can be used for repairs and to improve things like home accessibility for persons with disabilities
    • Can also cover mortgage payments during home repairs

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FHA 203k Loan Requirements

FHA 203(k) have the same eligibility requirements as the basic FHA loan plus requirements that are unique to the type of loan.

The FHA loan requirements are:

  • A credit score of 580 or higher - lenders may accept a credit score as low as 500 if you are able to make a higher down payment
  • The ability to pay a 3.5%-10% down payment depending on your credit score
  • Proof of steady income and consistent employment – this can include tax returns, pay stubs, or W-2s for a minimum of two years
  • Mortgage insurance – the ability to pay the mortgage insurance premium (MIP) is required. The dollar amount of MIP will depend on the amount of the loan. However, all FHA loans will require borrowers to pay an upfront MIP of 1.75%, as well as a monthly mortgage insurance premium for the life of the loan.
  • You must have an appraisal to ensure that the condition of your home meets FHA standards
  • Loan must be for a principal residential property
  • Higher Debt-To-Income Ratio: FHA loans can have a DTI of as much as 57% under certain circumstance. This makes FHA loans easier to qualify for than Conventional loans where the DTI can only be up to 45%.

There will be loan requirement differences for different types of FHA 203(k) loans as well as individual terms and requirements for approval from your lender. For example, an FHA 203(k) Standard loan will require you to have a consultant who has been approved by the U.S. Department of Housing and Urban Development (HUD) to supervise your home project. This is not a requirement of an FHA 203(k) Limited loan.

For more information about FHA 203(k) loans, contact New American Funding today. Our loan officers will be happy to answer any questions you may have and help you find the right loan to achieve your homeownership dreams.

FHA 203(k) Loan Benefits

FHA 203(k) loans have many benefits for borrowers. An FHA 203(k) home renovation loan is a great option for borrowers who want to finance home improvement expenses.

  • Buy a fixer upper: Finance an older home that needs significant remodeling
  • Get more options: Buy a home that you may not otherwise have been able to afford to repair
  • By combining your construction costs with your mortgage, you limit your closing costs and simplify the renovation process.
  • You can get up to $35,000 for improvements and the mortgage balance can exceed the appraised value of the home if guidelines are met. Get Started

Can you refinance your home with an FHA 203(k) Loan?

Yes, you can refinance your home with an FHA 203(k) loan. The percentage of your current mortgage that you’ll be able to refinance will depend on your credit score as well as other qualification requirements set by your individual lender.

Pros of an FHA 203(k) Loan

There are many pros to using an FHA 203(k) loan. FHA loans are often easier to qualify for than Conventional loans with lower credit score requirements and lower down payment requirements. You may also have lower interest rates with an FHA loan than you would with other loan types. You can use an FHA 203(k) to lump the costs of buying a home and renovating it into one loan. This loan can also pay for you to be housed while the repairs and renovations on your home are taking place.

Cons of an FHA 203(k) Loan

Like all large financial decisions, FHA 203(k) loans should be considered holistically.

While you likely have your own ideas for areas of your property you wish to improve, the FHA requires you to meet all relevant building codes when it comes to health and safety. Depending on when the property was constructed, this could mean lead paint, electrical issues, or other issues that will need to be resolved in addition to any alterations you’d like to make. The process of applying for an FHA 203(k) can also be longer than applying for other loans since there is more paperwork involved. FHA loans also have certain unique limitations since they are government-backed loans.

Bear in mind that for an FHA 203(k), you will need to pay an up-front mortgage insurance premium and monthly mortgage insurance each month. You may also be charged a supplemental origination fee which could add another $350 or 1.5%, whichever is greater.

New American Funding has tools to help you plan for your new home. Use our Mortgage Calculator and State Calculators to calculate your mortgage costs as you plan your personal budget.

Is it hard to get an FHA 203k loan?

Qualifying for an FHA 203(k) loan has similar requirements to other home loans including a minimum accepted credit score, income requirements, and debt considerations. How easy or difficult it will be for you to qualify for the loan depends on your own individual circumstances and how they compare to the requirements of the lender you are working with.

How long does it take to get approved for an FHA 203k loan?

How long it will take to get approved for an FHA 203(k) loan depends on many factors. You should expect it to take longer than other loan types due to the higher amount of paperwork required.

How much can you borrow on a 203(k) loan?

How much you can borrow on an FHA 203(k) loan depends on several factors. These include your geographic location, the property you want to purchase or renovate, and your individual financial circumstances.

What is the maximum contingency reserve on an FHA 203(k) loan?

A contingency reserve on an FHA 203(k) loan is an certain amount of money set aside for unforeseen repair or renovation costs. According to the HUD the maximum contingency reserve is 20% of the “financeable repair and improvement costs.”

Can you refinance after a 203(k) loan?

Yes, you can refinance a 203(k) loan. Check with your lender to find out the process and requirements of refinancing your 203(k) loan.

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