Types of 203k Mortgage Loans

Types of 203k Mortgage Loans for Fixer-Uppers

Gustan Cho Associates are mortgage brokers licensed in 48 states

This article covers the types of 203k mortgage loans for homebuyers of fixer-uppers. HUD offers two types of renovation FHA loans:

  • The standard FHA 203k loan
  • The FHA 203k streamline renovation loan

FHA 203k Loans Defined

HUD 203k Mortgage Loans are home loans where buyers can get an acquisition and construction loan all in one loan program and one closing. Most homebuyers fall in love with an area or neighborhood. But cannot find the perfect home for their families. They often run into fixer-uppers they can completely gut and rehab. Doing a gut rehab can turn their new fixer-upper into their dream home. This type of scenario would be the ideal candidate for a HUD 203k Mortgage Loan. Also, homebuyers who want to purchase a foreclosure or fixer-upper would benefit from 203k Loans.

Types of 203k Mortgage Loans Versus Type of Renovation

There are two types of 203k Mortgage Loans. The qualification requirements on behalf of the borrower are the same for the two types of 203k Mortgage Loans. There are FHA 203k Mortgage Loan Requirements that the borrower needs to qualify for.

HUD 203k Mortgage Guidelines

Here are the basic FHA Guidelines that the borrower needs to meet to qualify for the two types of 203k Mortgage Loans. Borrowers need a 3.5% down payment for the after improved value of the property. For example, here is a case scenario:

  • if the cost of the property is $100,000
  • and it requires $100,000 to rehab the subject property for a total of $200,000
  • and it appraises for $200,000

Then the home buyer would have to come up with 3.5% of the $200,000 or $7,000 for the down payment.

Down Payment and Closing Costs on 203k Loans

FHA 203k Guidelines allow up to a 6% seller’s concession to be used for closing costs. Meet minimum 580 Credit Score Requirements. Borrowers can have outstanding collection accounts and charge-off accounts and still qualify for 203k Rehab Mortgages. They do not have to pay off the outstanding collection accounts and charge off accounts.

Lender Overlays on FHA 203k Loans

If the lender says borrowers do not qualify for a 203k Loan unless they pay off your outstanding. collection accounts and/or charge off accounts it is because they have their own overlays on FHA 203k Loans. Borrowers DO NOT HAVE TO PAY OFF outstanding collections and/or charge offs to qualify for an FHA Loan including FHA 203k Rehab Loans.

203k Mortgage Guidelines After Bankruptcy

There is a two-year waiting period after a Chapter 7 Bankruptcy to qualify for an FHA 203k loan. Homebuyers can qualify for a HUD FHA 203k loan into a Chapter 13 Bankruptcy repayment plan. There is no waiting period to qualify for an FHA 203k Mortgage after a Chapter 13 Bankruptcy discharged date. However, to qualify for an FHA Loan right after a Chapter 13 Bankruptcy discharged date and discharge have not been seasoned for at least two years, then it needs to be manually underwritten.

Verification of Rent Guidelines on Manual Underwriting

All manual underwrites require Verification Of Rent also called VOR. FHA 203k Mortgages are considered higher-risk loans. Most lenders do have FHA Overlays on the two types of 203k Mortgage Loans. Debt to income ratios is capped at 50% DTI. All FHA Guidelines that apply to regular FHA Loans apply for the two types of 203k Mortgage Loans.

The Two Types Of FHA 203k Mortgage Loan Programs

There are two types of 203k Rehab Loans. Below are the two types of 203k Mortgages and the description of them:

203K Streamline:

  • 203k Streamline Rehab Loan is one of the two types of 203k Mortgage Loans that are designed for borrowers
  • It is designed for buyers who need minor repairs such as cosmetic rehab with a budget of less than $35,000 in total rehab costs

Standard FHA 203k Loans

Full Standard FHA 203k Loans are the second type of 203k Mortgage Loans that permit larger home improvement projects such as the following:

  • room additions
  • major repairs
  • structural modifications to the home
  • complete gut rehab projects with no construction limit
  • but the total acquisition and rehab cost cannot exceed the FHA Loan Limits
  • the appraisal needs to appraise after the repairs have been made

203k Streamline Loan Lending Guidelines

HUD 203k Streamline will limit the type of construction the homeowner can do. Cannot major renovations such as room additions or structural changes with 203k Streamline Rehab Loans. Only limited to cosmetic repairs. The value of the property after appraisal cannot exceed 110% Loan To Value after repairs. Cosmetic repairs generally do not increase the market value of a home. HUD is aware that general basic updates on a home will not greatly improve the market value of a property.

Types Of Work Allowed On Streamlines

Here are the types of remodeling that can be done with an FHA 203k Streamline Rehab Loan:

  • Kitchen Remodeling
  • Basement Remodeling
  • Attic Remodeling
  • Bathroom Remodeling
  • Siding
  • Roofing
  • HVAC Systems
  • Windows and Doors
  • Gutters/Soffits/Fascia
  • Painting, Wallpapering, and new millwork such as new doors, trim
  • Other woodwork around the exterior and interior of the home
  • New hardwood flooring, carpeting, tiles
  • New appliances

Standard FHA 203k Loans

Standard Full 203k Loans have no construction funding limits. Can have unlimited rehab budget up to the maximum FHA Loan Limits in the county. BUT the home needs to appraise after improvement..

For example, here is a case scenario:

  • if the buyer were to purchase a home for $100,000
  • and needed a $150,000 construction budget
  • the after improved value of the property after repairs needs to appraise at $250,000

The amount of down payment required for the Standard 203k Rehab Loan is 3.5% of the after improved value.

Types Of Work Allowed With Standard Full 203k Loans

Here are cases where Standard 203k Loans would benefit a home buyer:

  • Buyers who are purchasing a fixer-upper
  • Buying a foreclosure that needs a lot of work
  • Buying a home that is not habitable
  • Homebuyers who are buying a home that needs total gut rehab
  • Those who are purchasing a home that needs room additions and substantial addition of square footage

Homebuyers who think FHA 203k Loan is a great fit for you and need more information, please do not hesitate to contact Gustan Cho Associates at 800-900-8569 or text for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays. Gustan Cho Associates is a five-star mortgage company licensed in multiple states known for not having any overlays and closing loans in 21 days or less.

Standard FHA 203k Loans For Buyers Of Fixer-Uppers

There are two types of FHA 203k Loans:

  • Streamline FHA 203k Loans
  • Standard FHA 203k Loans

FHA 203k Streamline loans is a great acquisition and construction FHA Rehab Loan Program but it is for minor rehab. You are only limited to a construction budget of $35,000 with a Streamlined FHA 203k Loan Program and cannot do structural changes and/or room additions. In the following paragraphs, we will discuss and cover 203k loans for buyers of fixer-uppers.

Streamline Versus Full FHA 203k Loans

Here is what you can do with a Streamline FHA 203k Loan Program:

  • Maximum construction budget limited to $35,000
  • Cannot do room additions or structural changes
  • Can replace appliances such as refrigerators, washers, dryers, dishwashers
  • Can replace and/or fix HVAC systems
  • Can replace or refurnish flooring, carpeting, hardwood floors, tiles, walls, painting, millwork, doors, windows, siding, roofing, gutters, soffits, fascia, and other cosmetics
  • Can remodel bathroom, kitchens, and rooms

Cannot do outdoor luxury items such as install outdoor kitchens, tennis courts, add jacuzzi tubs, or swimming pools.

Standard Full 203k Loans

Streamline Versus Full FHA 203k Loans

With the full 203k Loans, borrowers can do all of the above plus more. Standard 203k Loans are for larger construction projects such as the following:

  • All jobs that can be done with Streamlined 203k, homeowners can do it with Standard FHA 203k Loans
  • Complete gut rehab projects
  • Room additions which include two-story additions or side additions
  • Standard FHA 203k Loans allows the homeowners to make structural changes
  • They can add to the existing square footage of the home
  • Allows homeowners to build on the existing foundation of the home
  • Or relocate the existing home and move it to another location
  • Repairs are over $35,000
  • There is no construction limit as long as the acquisition and construction loan amount does not exceed the maximum FHA Loan Limits for the area
  • Unlike the Streamline FHA 203k Loans where the maximum contractor draw is limited to two, with Standard FHA 203k Loans, HUD 203k Contractor can ask up to 5 construction draws

HUD FHA Inspector needs to come out to inspect the work completed prior to each draw request from the 203k Contractor to make sure that the work has been completed before the cash is released.

Types Of Work That Is Permitted With FHA 203k Loans

Here is additional work that can be done with Standard FHA 203k Loans. With the Standard FHA 203k Loans, structural alterations and room additions can be performed. Attached or detached garages can be built. Kitchens, bathrooms, and bedrooms. Alterations to reduce obsolescence as well as to reduce maintenance. Complete replacement of electrical, plumbing, and HVAC systems. Replacement and/or installation of wells and/or septic systems. Roofing, gutters, soffits, and downspouts. Flooring, hardwood floors, tiles, and carpets. Energy savings systems and/or upgrades. Major landscaping projects to the subject property. Accessibility changes and/or enhancements. New non-attached home appliances.

Exterior and Interior Renovations with FHA 203k Loans

Exterior and interior improvements. Existing swimming pool and/or jacuzzi repairs. Any home improvement project that is a PERMANENT part of the subject property. Luxury projects such as the addition of a new outdoor kitchen or other amenities are not permitted. Standard 203k Loans require an approved HUD Home Consultant which the borrower chooses from the list of HUD-approved lists of consultants.

Pros And Cons With FHA 203k Loans

Standard 203k Loans can be extremely lucrative for the right home buyer. Many home buyers can buy fixer uppers and do a complete gut rehab and customize their home like a brand new house with structural changes and remodeling as follows:

  • Customize the whole structure to the home
  • Do second story additions or side additions to the existing home such as adding on an office, extra bedroom, combining rooms, or adding on a master suite with an additional master bath
  • Choose the type of flooring they want throughout their homes such as carpeting, hardwood flooring, or tiles
  • Repaint the whole house and rooms to the color of their preference
  • Complete change windows and add bay windows
  • Strip the exterior and add new siding or brick veneer
  • Square footage adds value to the existing home

Additional square footage adds value to the home. If the homeowner is planning on doing a room addition with their FHA 203k Loan, that can add substantial value to their property and get instant equity once the addition is complete. For example, if a homeowner is planning on doing a 1,000 square foot room addition and that cost may be $50,000, the after improved value due to that addition may be an overall increase of the market value of $100,000 depending on the area the property is located.

Negatives Of Renovation Loans

Negatives of Standard FHA 203k Loans are the following:

  • Large rehab projects can be stressful
  • There are times when contractors and homeowners have conflicts
  • There are potential where the homeowner fires the contractor and needs a new contractor
  • Choosing the right general contractor who is experienced is extremely critical and very important
  • Large construction projects take time
  • Larger rehab projects, especially room additions can take several weeks if not months
  • Delays can happen especially with building permits
  • Mortgage rates are higher with FHA 203k Loans due to the added layered risk

Qualification requirements to qualify for FHA 203k Loans are the same as regular FHA Qualification Requirements.

Manual Underwriting on FHA 203k Loans

There is no manual underwriting allowed with FHA 203k loans. Both Streamlined and Standard FHA 203k Loan Programs. The above are pros and cons with Standard FHA 203k Loans. However, the pros definitely outweigh the cons and many homeowners benefit, especially with instant equity, after the completion of their Standard FHA 203k loans. If you are interested in learning more about both Streamlined and Standard FHA 203k Loans, contact us at  Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays to take your call or mortgage inquiry.

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