What is a 203k? And how do I get one?

08.25.2016

Long gone are the days where a fixer upper was considered something to be avoided. These days many house hunters are actively seeking homes that need renovations. However getting approved to purchase a blighted home can be difficult. Because the move-in date is contingent upon significant renovations, you may not be able to sell your current home before the purchase. And many banks simply won’t write a loan for a house that is considered “uninhabitable.”

The Full Consultant 203(k) program is designed for extensive construction and rehab projects. It is a HUD loan, backed by the federal government, designed to entice homebuyers to invest in blighted or historically neglected neighborhoods, and help repopulate urban population centers. So how does it work? Let’s say you have your eye on a half-renovated property. A 203(k) lender would then give you the money to buy (or refinance) the house, plus the additional money needed to complete the renovations.

Oftentimes a 203(k) loan will also include a 20% contingency reserve for the all-too-common pitfall of a project gone over budget. It may also include a provision that pays six months of the mortgage, covering your rent costs during the remodel.

 

How much money can you get?

The minimum amount you can borrow with the 203(k) is $5,000. The maximum depends on a variety of factors, especially the type of loan (ex. regular vs. streamlined).

With a Regular loan, the maximum amount of the loan will be the lesser of these amounts:

OR

  • The Loan-to-Value (LTV) ratio from the purchase Loan-to-Value Limits, multiplied by the lesser of:
    • 110% of the After Improved Value
    • The Adjusted-As-Is Value plus improvement costs, fees, and mortgage payment or contingency reserves.

The refinance rates will be similar but will take into account the amount owed on the property.

With a Streamlined loan you can get a loan for the purchase price + up to $35,000 in repair costs plus the costs for energy improvements. For this type of loan you are required to put down at least 3.5% as a down payment and you will need to have an appraisal done of the property.

*In Orleans Parish, the maximum FHA loan for a single-family home is $271,050.

 

What types of property can I buy?

Since the 203(k) program is federally funded, the property must pass all the usual FHA requirements. For example, the home must be intended as a primary residence. Borrowers must have a minimum credit score of 500. And the property must be appraised by an FHA-approved appraiser.

The 203(k) program is available for 1, 2, 3, and 4-unit properties.

The home may be completely torn down, but at least some of the foundation must still be in place.

The home may not be a co-op, although some condos are eligible.

 

What types of renovations qualify?

A Regular 203(k) loan is given for major renovations such as structural repairs, remodeling, plumbing, landscaping, etc. The Streamlined or Limited 203(k) covers things like energy conservation, new roofing, appliances or painting. Unfortunately improvements like adding a pool or tennis court are not eligible for the program.

All renovation work must start within 30 days of closing on the property. The work cannot be stopped for more than 30 days and must be fully completed within five months. You will also need hazard insurance for all the planned improvements in order to close.

All the work must be perfomed by a Lender-accepted contractor. This limits the ability of the homeowner to do it themselves.

 

203(k) vs. Home Equity Line of Credit

FHA 203(k) Home Equity Loan
  • Loan amount is based on expected appraised value after renovations is complete.
  • Loan amount is determined based on your current equity in your home.
  • One mortgage includes both the cost of the home and the remodeling costs
  • Treated as a second mortgage.
  • Must use an FHA approved lender
  • Can use any bank or credit union
  • Length of loan will be the same as the mortgage.
  • Length of loan can be variable, as short as one year.
  • Work must be completed within 5 months.
  • Work may be completed at the homeowner’s leisure.
  • Work must be performed by a Lender-approved contractor
  • Work may be performed by anyone.

 

 

203(k) loans can be a great option for those looking to buy a lower-cost fixer upper. You can read more about them on HUD’s website.

 


 

If you’re interested in securing a 203(k) loan in Florida or Louisiana, contact originations@emfloans.com or 800-584-2442.