The Federal Housing Administration’s 203(k) loan program can help homeowners pay for a variety of home repairs and upgrades. From making a property handicapped-accessible to waterproofing a home or simply upgrading appliances in poor condition, the FHA’s 203(k) loan program may be able to help.
The FHA’s 203(k) loans range from $5,000 to $35,000, and cover an assortment of projects designed to rehabilitate and repair single family properties. While the FHA does not directly dole out the money, it insures the loan in a partnership with a lender.
Eligible properties must be one to four dwelling units that have been constructed for at least one year. Additionally, the units must comply with local zoning regulations. Loans may apply to houses moved from one site to another for rehabilitation.
“It is the department’s primary program for rehabilitation of single family homes,” Richard Bradley, credit policy specialist with the U.S. Department of Housing and Urban Development, said.
Benefits of a 203(k) loan extend to all ends of the spectrum. Typically, purchasing a home needing repairs or upgrades is a multi-step process. Homebuyers must obtain funds to purchase a home, and then secure additional funds to pay for the upgrade. These short term loans can come with high interest rates. The 203(k) loan allows the borrower to take out just one mortgage to cover both the purchase of the property and the cost of upgrades.
“You can roll a lot of charges into one loan,” Bradley said.
On the other end, lenders can sleep easier knowing the loan is insured by the FHA, and that they have an opportunity to help renovate low-income housing in need of repair. Housing sellers can also reap the benefits, as minor defects in the property no longer need to be a thorn in the side of potential buyers.
Current homeowners can also use 203(k) to refinance existing loans.
First-time borrowers should begin the process by consulting a housing counselor, who will counsel them on how to proceed.
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While typical FHA loans have up to 20,000 approved lenders, Bradley said, 203(k) loans require additional administrative capabilities that many lenders do not have.
To find a 203(k) supported lender, a search can be found on the Housing and Urban Development website.
Depending on the scale of the project, there are two 203(k) options for borrowers.
The standard 203(k) program begins with a feasibility study, overseen by an approved consultant. Through this process, the FHA determines whether the improvements would be justified upon completion.
“In some cases you have a home where, if you put $50,000 into it, it would not increase property values $50,000,” Bradley said. “Then the person investing in the mortgage is not secured.”
Along with the lender, the consultant monitors the project’s progress and performs a final inspection upon completion. Escrow is then closed out, and the remainder is paid down against principal.
For smaller, less complex projects, borrowers can use the streamlined 203(k) program.
This version allows homeowners to use a certified contractor, such as those found through Lowe’s Home Improvement or Home Depot.
It is essentially a simple project,” Bradley said. “It is a project with a very short horizon.”
“You can see the beginning, and you can see the end.”
The streamlined program can be used when there are no permits, plans or specs needed, he said. The simplified process eliminates the need for a consultant, and consultant’s fees.
Both versions of the program have a six-month deadline for completion, although there are extensions available when warranted.
“We certainly want the projects completed quickly,” Bradley said. “The longer they take, the more problems they seem to incur.”
For more information or to find a FHA 203(k) capable lender, go to www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm.
For a table with the numbers of FHA loans issued from 1996 to present,click here.
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