Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover and discuss FHA 203k loan for fixer-uppers and gut-rehab homes. Many home buyers look at dozens of properties if not hundreds of properties and many cannot get their perfect home. They may get a great neighborhood. However, the house may be too small, outdated, not have enough bedrooms, not have enough bathrooms, need new mechanical systems, need a new kitchen, need new roofing, need new windows. Or the property may need a complete gut rehab or tear downs. After the real estate and credit meltdown of 2008, construction and bridge financing became almost non-existent to home buyers and homeowners. HUD’s FHA 203k loan program is an acquisition and renovation program for homebuyers seeking to purchase a fixer-upper. In this article, we will discuss and cover the FHA 203k loan program for homebuyers and homeowners of fixer-uppers.

In this article (Skip to…)

Types Of FHA 203k Loan Programs

Types Of FHA 203k Loan Programs

FHA now offers two types of acquisition and construction mortgage loan programs all in one loan and closing. The first is the FHA 203k streamline mortgage loan program. The FHA 203k streamline limits the maximum construction. The rehab loan limit is capped at $35,000. It can be used for non-structural rehabs such as kitchen and bathroom remodeling, new flooring, painting, millwork, mechanical systems, windows, roofing, siding, basement remodeling, attic remodeling, and other non-structural remodeling projects. Structural work is not allowed on streamline 203k loans.

The Full Standard FHA 203k Loan

The second 203k loan program is the Full Standard FHA 203k Loan program. There is no construction loan limit with the Standard 203k loan. The acquisition and renovation loan limits are capped at the maximum FHA loan limit for the county. The after completed value needs to appraise. 2022 FHA loan limit is capped at $420,680 on single-family homes. Structural construction is permitted on the full standard 203k loan program. Room additions, second-floor additions, gut rehab, and even tear downs are permitted with a Full Standard 203k Loan program.

The Streamline FHA 203k Loan

A home buyer can now purchase a foreclosure, short sale, or REO home that is in need of minor repairs. The FHA 203k Streamline Purchase loan program enables the home buyer to seek an acquisition and construction mortgage loan at the same time with one closing. This program is for home buyers that purchase a home that needs minor repairs such as kitchen remodeling, bathroom remodeling, attic remodeling, basement remodeling, new windows, appliances, roofing, flooring, and other non-structural repairs. The maximum amount of the FHA 203k Streamline purchase loan program is $35,000 which includes costs such as permit fees and reserves associated with the rehab. Luxury items such as pools, tennis courts, and basketball courts are not allowed. Room additions and second-floor additions are not allowed.

Buying Foreclosure Or REO With FHA 203k Loan

Homebuyers can get great deals in buying a foreclosure or REO property. Many foreclosures and REOs are not financeable. This is because they cannot pass the appraisal inspection. Many foreclosures and REOs are in dire need of repairs such as new flooring, kitchen, and bathrooms, and many have been occupied by squatters and are not habitable.

Lender Overlays on FHA 203k Loan Programs

Most mortgage lenders who own foreclosures and REOs on their books do not want to spend a dime on rehabbing the property and want to sell it as is. Unfortunately, most of these properties can only be sold to cash buyers. This is because mortgage lenders will not lend to a property that is not habitable. With a 203k Loan, homebuyers can get some great deals on a home. They can also get the construction money to fix and customize the property the way they want. Most mortgage lenders who own foreclosures and REOs are eager to entertain a 203k Loan approved homebuyer.

Standard Full 203k Loan

Standard Full 203k Loan

The Standard 203k mortgage loan program has no construction limit as long as the property appraises out after repairs. Unlike the FHA 203k Streamline mortgage loan program, structural changes and room additions are allowed with the Standard FHA 203k mortgage program. 2nd story additions and room additions are very common with the Standard 203k mortgage loan program. Complete gut rehabs and tear downs are permitted with a Full Standard FHA 203k loan.

Qualification For FHA 203k Loan

Any home buyer that qualifies for the traditional FHA loan program can qualify for both the FHA 203k Streamline mortgage and Standard 203k mortgage programs. Mortgage rates for the 203k loan programs are typically slightly higher than standard FHA loans. The appraisal that is required is an as-is property appraisal and an as-complete property appraisal. The general contractor cannot be a family member and the general contractor needs to be licensed, insured, and bonded. The general contractor is responsible for the work of all sub-contractors. The homeowner has the final say in authorizing the draw for the general contractor.

Down Payment Required On 203k Loans

The FHA 203k mortgage loan applicant needs a 3.5% down payment on the as-completed appraised value. For example, if a home buyer purchases a home for $100,000 and pursues a Full Standard 203k Loan and the estimated cost of repairs is an additional $100,000, the total cost of the home purchase and rehab is $200,000. The home buyer is required to have 3.5% of the $200,000 which is a $7,000 down payment. If you currently have a home in need of repairs, we can also refinance your current mortgage loan via an FHA 203k Loan so you can update or do a major renovation on your home. Most FHA 203k Loans take 45 days to close from the date of the mortgage application submission.

Closing Costs On 203k Loans

On any home purchase transaction, there will be closing costs which cover any costs and fees associated with the origination of the mortgage loan as well as third party charges and fees such as title charges, appraisal fees, inspection fees, attorneys fees, homeowners insurance fees, recording fees, pre-paid, and any other fees and costs.  Most homebuyers do not have to worry about closing costs because closing costs can be covered through a seller’s concession towards a home buyer’s closing costs or a mortgage lender credit towards homebuyers closing costs.  Structuring the purchase contract the right way is key when a home buyer wants to purchase a home through an FHA 203k loan.

What Is An FHA 203k Loan?

FHA 203k loan are called rehab mortgage loans. With an FHA 203k Loan, homebuyers can purchase a property that needs repairs. Lenders will lend the cost of the home plus the repair costs all in one mortgage loan. There are two different types of FHA 203k loans. The streamlined FHA 203k loan has a maximum construction loan limit for the cost of repairs to $35,000. Homeowners can do minor repairs such as the following with the streamline FHA 203k loan:

  • kitchens
  • bathrooms
  • basement, attic
  • mechanical systems
  • windows
  • flooring siding
  • gutters
  • soffits
  • fascia
  • exterior siding
  • painting
  • appliances
  • other non-structural repairs

Scope of Work You Can Do With the Standard FHA 203k Loan

Scope of Work You Can Do With the Standard FHA 203k Loan

The full standard FHA 203k Loan has no construction budget limit and homeowners can do the following:

  • room additions
  • second story additions
  • structural improvement
  • Any project that can be done with a streamline FHA 203k loan can be done with a full standard FHA 203k loan.

FHA 203k loan mortgage options give a homebuyer an opportunity to purchase a fixer-upper and customize it the way they want.

FHA 203k Loans Is The Next Best Thing To A Custom Built Home

Unless buyers custom-build their home, a home that is already built will most likely not satisfy the home buyer’s needs. May find a home in a perfect neighborhood but the home may be too small. You may have found a home on a perfect lot but the home may be too small or need a lot of work.I

Renovate To Your Likings Using FHA 203k Loan Options

May have found a perfect home but it only has two bedrooms but the family needs three bedrooms. May have found a home that is perfect but the home is old and in dire need of a major rehab but does not have the money after the down payment. All of the above case scenarios can be solved by purchasing a home in need of rehab or major construction through HUD’s FHA 203k Loans. The FHA 203k Loan program is the next best thing to new construction. FHA 203k loan enables buyers to purchase a home in major need of repairs and can customize it the way owners want which also includes a complete gut rehab. With an FHA 203k Loan, homeowners can turn that old tired home on a perfect lot into a brand new home that is customized to the family’s needs.

HUD’s FHA 203k Loan Program

The United States Department of Housing and Urban Development is the parent of the Federal Housing Administration, also known as FHA. FHA has created the FHA 203k Loans to promote homeownership in distressed areas. It was also created to help homeowners who were motivated to purchase distressed properties in need of rehab and make them habitable again. By rehabbing vacant homes or homes in need of major repairs, it will also revitalize the neighborhoods. It promotes stability in neighborhoods and also promotes homeownership.

Benefits of FHA 203k Loan Programs

FHA 203k loans are one of the most popular mortgage loan programs today. It doesn’t just attract home buyers seeking a home loan with bad credit but buyers with stellar credit as well. It is almost next to impossible to get a construction or rehab loan from banks and credit unions. After the real estate and mortgage meltdown of 2008, construction and rehab loans have become extinct. They are very few banks and lenders that offer them. Borrowers need stellar credit and reserves and extremely low debt to income ratios. Now, with HUD’s FHA 203k loans, acquisition and rehab loans are extremely easy and streamlined. Borrowers need is a 580 credit score and a 3.5% down payment on the after improved value of the home.

Types Of 203k Loan Programs

There are two types of FHA 203k Loans available to home buyers and homeowners seeking FHA 203k loans.

The standard full FHA 203k Loan is for homebuyers or homeowners who need extensive rehab to their homes such as the following:

  • room additions
  • second story additions
  • structural work on their home
  • There is no cost or repair limit as long as the after improved value appraises out

Homebuyers or homeowners needing more than $35,000 in repairs to their homes will need to apply for the full FHA 203k loan.

FHA 203k Loan Streamline Mortgages

FHA 203k Loan Streamline Mortgages

The second type of FHA 203k loan program is the FHA 203k Streamline loan which the maximum loan amount on the repair is capped at $35,000. This includes reserves and costs of permits, consulting fees, and other fees. The streamline FHA 203k loan is for minor repairs such as the following:

  • kitchens
  • bathrooms
  • basement remodeling
  • attic remodeling
  • windows
  • flooring
  • mechanical systems
  • exterior siding
  • roofing
  • gutters
  • other non-structural rehabs

There is a 20% contingency reserve requirement in the event the estimated cost of construction exceeds the initial proposed construction budget and in the event of construction cost overruns. This reserve will be deducted from the $35,000 rehab financed amount and set in escrow.

Qualify Today For an FHA 203k Loan

Buyers of fixer-uppers needing to qualify for an FHA 203k loan, contact us via email, phone, or text. You can email us at GCA Mortgage Group at [email protected] Or contact us at 262-716-8151 or text us for a faster response.  Borrowers can apply online by clicking on APPLY NOW FOR A FHA 203K LOAN and get pre-approved today for an FHA 203k loan.

FHA 203k Loan FAQ

By popular demand, we are publishing a blog on the frequently asked questions about FHA 203k loans. Gustan Cho Associates is a mortgage broker licensed in 48 states (not licensed in Massachusetts and New York) with over 170 wholesale lenders. We have every mortgage options that are available in today’s market including FHA 203k loans. We will be covering the most frequently asked questions about FHA 203k loans. If you have any questions or need more information, please contact us by clicking the link below:

Frequently Asked Questions About FHA 203k Loans: Learn More…

What Are FHA 203k Loans?

HUD, the parent of FHA, launched the FHA 203k loan program. 203k loans are available to home buyers to purchase a home that needs work. The 203k loan program consists of the acquisition and construction funding all in one loan and closing. Homebuyers using the FHA 203k loan make ONE payment to the bank. Many homes qualify for this program such as condos in a 4 unit complex, single-family homes, entire multi-unit buildings up to 4 units, manufactured homes built after 1976, and even mixed-use buildings. Mixed-use commercial-residential buildings consisting of a store and residential living space on the second floor may be eligible for an FHA 203k loan. The commercial portion of the mixed-use building cannot have a floor space of greater than 49%. The residential portion of the mixed-use property needs to be 51% or larger.

What Are The Two Types of FHA 203k Loans?

A full Standard FHA 203k loan is an acquisition and construction loan which enables you to remodel the home of your dreams with just one single loan. There is no limit on the loan amount as long as the subject property will meet the as-completed value. Architectural drawings by a professional architect are a must for those 203k loan borrowers who have projects that are complex. Streamline FHA 203k loans are renovation loans that have a limited construction budget of up to $35,000.

What Type of Properties Are Eligible For FHA 203k Financing?

FHA loans are for owner-occupant primary homes only. You cannot finance a second home, second home, or investment property with an FHA loan. Any residential zone single-family homes are eligible for FHA 203k financing. Single-family homes, townhomes, FHA-approved condos, and two to four-unit multi-family homes are all eligible for FHA 203k loans.

Buying Fixer Uppers With an FHA 203k Loans

Another common frequently asked question about FHA 203k loans is if you can buy gut-rehab fixer-uppers. The answer is yes. For homebuyers planning to buy a HUD home, fixer-upper, foreclosure, or short sale and want to renovate their home, a 203k loan might be ideal. Whether remodeling the basement or attic or doing a room addition, an FHA 203k loan can be ideal for homebuyers buying a home or homeowners refinancing their current loan into an FHA 203k loan. There are two types of FHA 203k renovation loan programs: The Full Standard 203k and the Streamline 203k Loan. We will cover the two different types of FHA 203k loans in the following paragraphs.

How Does The FHA 203k Loan Program Work?

One of the most frequently asked questions about FHA 203k loans is how much money can I get for renovations and how the FHA 203k program work. There are two mortgage options homebuyers can choose from with 203k loans. The Full Standard 203k and the Limited Streamline FHA 203k loans. The first option is the streamline limited FHA 203K loan where the maximum budget is $35,000 for the cost of construction, cost, and fees of permits and drawings.

How Much Are Architects, HUD Consultants, Permit Fees Cost?

In general, it is estimated a typical homeowner will spend between $1,000 to $1,500 in costs and fees on a limited streamline FHA 203k construction project. You cannot do structural changes and/or room additions with the streamline limited FHA 203k loan. The second 203k loan option is the full standard FHA 203k loan. The maximum loan limit is up to the county’s FHA loan limit. You can do gut rehab, structural changes, and room additions with the full standard FHA 203k renovation loans.

Hiring a General Contractor in Charge of the Trades For the FHA 203K Construction Project

One of the common frequently asked questions about FHA 203k loans is hiring a general contractor for the renovation project. General contractors are not architects and oftentimes will subcontract our architectural services to licensed architects. Homebuyers who are interested in purchasing a property via a 203k loan in the Chicagoland area may need to hire a Hiring FHA 203k Loan Consultants For 203k Rehab Loans.

Do I Need The Permission of the Lender in Hiring the General Contractor?

It is up to the homeowner to hire a general contractor to oversee the construction project. With streamline limited FHA 203k loans, general contractors get compensated after the work has been completed and passed inspection. This will ensure the general contractor completes the job prior to getting paid. On full standard FHA 203k loans, general contractors will get partial payments as the job is completed and the waiver of liens has been provided. Part of the role of the HUD consultant is to sign off on the partial payments and make sure the general contractor is not getting paid more than he deserves.

Hiring a HUD Consultant For 203k Rehab Loans

One of the frequently asked questions about FHA loans is hiring a HUD consultant to oversee the construction project. HUD does not require you to hire a HUD consultant on a limited streamline 203k construction project. A HUD consultant is required on a full standard FHA 203k renovation project. The loan officer can give you a list of recommended HUD consultants in the area or you can get a list from HUD. The HUD consultant performs a full analysis of two aspects of construction.

The Role of the HUD Consultant During The 203k Renovation Construction Process

In the first aspect, the HUD consultant will review the scope of work and determine how much it costs to bring the home to code and HUD’s minimum property standards. With regards to the second aspect, the HUD consultant will review the scope of work and costs of the homeowner’s desired renovation goals such as room additions, finishing the basement and/or attic, kitchen and bathroom remodeling, and other renovation projects. The lender will count on the HUD consultant for the supervision and costs of the renovation.

Can I Buy A Fixer-Upper That Needs Gut Rehab?

The Full Standard FHA 203k loans enable homebuyers to purchase a fixer-upper and customize it to their standards. The whole house can be torn down to the concrete foundation. Homeowners can do structural changes, do a full addition or second story addition, complete updates to both the exterior and interior of the house and other major renovations. Professional collaborations with Brokers and Loan Officers to help optimize strategies for clients when 203K Loans or other types of construction loans are part of the financial formula in obtaining the funds necessary for the clients’ project. It is very important to symphonize all teams involved in the process early on since this is a streamlined limited-time loan. Every day may be critical in obtaining a finished product on time with the evolvement as the loan progresses.

Can I Do Room Additions and Structural Changes Using FHA 203k Loans?

The housing market is booming with no sign of a correction. Many homeowners who need to upgrade to a larger home cannot afford the skyrocketing home prices. Frequently asked questions about FHA 203k loans is can I do a room addition to my existing home with a FHA 203k loans? The answer is a solid YES. As long as the minimum property requirements of HUD (MPR) are met, you can definitely upgrade your home by adding on. All work needs to be done per code. Architect drawings and proper permits will be required.

What Type of Luxury Repairs Can I Do Using The 203k Renovation Loans?

Another frequently asked question about FHA 203k loans is if you can use your FHA 203k loans to do luxury repairs. You cannot install brand new tennis courts, in-ground pool, outdoor kitchen, or exotic pond with waterfalls. However, you can repair luxury projects that are existing but in need of repair. For example, if you have a tennis court with cracked flooring with weeds growing out of control, you can fix the tennis court. Same with an in-ground pool. If you have an in-ground pool that is in need of major repairs or you want to take it out, you can do the pool project using your FHA 203k loans. However, you cannot repair an above-ground swimming pool since it is not fixed to a permanent structure of the subject property.

Can I Buy A House With An FHA 203k Loan That Has Been Fire-Damaged?

In today’s booming housing market, homes are being sold the minute they are listed. One of the frequently asked questions about FHA 203k loans is if a homebuyer can purchase a fire-damaged house that needs extensive renovation. The answer is absolutely under one condition. The foundation needs to be solid without any damage. You can build a new house on the existing foundation. The after-competed home needs to meet HUD property guidelines. You can extend the foundation to customize your new home build.

How Long Do I Have To Complete My Renovations Using FHA 203k Loans?

One of the most frequently asked questions about FHA 203k loans is how long a homeowner has to finish their renovations using the FHA 203k loan. All renovations need to start within 30 days of closing the 203k loans. All projects need to be finished no later than six months. All full standard FHA loans require a HUD consultant. Limited streamline 203k loans do not require a HUD consultant. However, a HUD consultant is recommended on all FHA 203k loans. Using a HUD consultant can help homeowners with the Specification of Repair or Scope of Renovation and Cost Estimate writeup for your mortgage lender and can be a safety net of getting overcharged of ripped off. The HUD consultant can make sure the bids you are getting for the project are within reason.