What Are FHA 203k Loan Programs And Lending Guidelines

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What Are FHA 203k Loan Programs And Lending Guidelines

This BLOG On What Are FHA 203k Loan Programs And Lending Guidelines Was UPDATED On May 4th, 2018

Home Buyers planning on buying a home that needs renovations or currently own a home needing renovations work, HUD’s FHA 203k Loan Program may be the solution.

  • Getting a construction loan these days is extremely difficult
  • Many construction lenders will make borrowers go through red tape
  • Getting a second mortgage and/or home equity line of credit requires equity in home
  • HELOC requires credit scores of over 700 and DTI caps of 45%
  • For home buyers who are planning on purchasing a foreclosure, short sale, or REO in dire need of rehab can now qualify for FHA 203k Loan Programs with Gustan Cho Associates Mortgage Group
  • FHA 203k Loan programs allow home buyers and homeowners get an acquisition and construction in one single home loan with no hassles
  • FHA 203k Loan Programs are available only to owner occupant homeowners
  • Any residential property from one to four units are eligible

What Are The Basics Of FHA 203k Loan Programs?

The United States Department of Housing and Urban Development (HUD) is the parent of the Federal Housing Administration, FHA.

  • HUD launched FHA 203k Loan programs to promote and revitalized homes in need in repair and revitalize neighborhoods
  • FHA 203k Loan programs is available in all 50 states
  • There are two different classes of FHA 203k Loan programs
    • The first FHA 203k Loan program is called the FHA 203k Streamline which is for limited repairs and the maximum construction loan amount is capped at $35,000
    • The second class of FHA 203k Loan is called the Standard 203k Loan which has no construction loan limit and a full major renovation can be done including room additions, structural changes which include moving existing walls
  • Both the Streamline and Standard FHA 203k Loan programs are for acquisition and construction purposes and no cash-out is allowed

How Can I Qualify For A FHA 203k Loan Programs?

Since FHA 203k Loan Programs are FHA insured loans. The same FHA lending guidelines apply with FHA 203K loan programs as it does with the standard FHA lending guidelines.

  • However, 203k Loan mortgage lenders may impose higher guidelines with 203k Loans called mortgage lender overlays on top of the minimum mandated by HUD
  • Some overlays with 203k Loan programs imposed by 203k lenders may be the following:
    • higher credit scores
    • reserves
    • lower debt to income ratios
  • FHA 203k mortgage rates are normally 0.50% higher than standard FHA loans

Down Payment On FHA 203k Loan Programs

Minimum down payment requirements is 3.5% down payment on the after improved value.

  • For example, if the home buyer is purchasing a home for $100,000
    • The cost of construction is $200,000 to yield the after improved appraised value of $200,000
    • The home buyer needs to come up with 3.5% down payment of $200,000
  • To qualify for a FHA loan with 3.5% down payment, mortgage lenders will require a 580 credit score
  • Most 203k mortgage lenders want to see a minimum credit score of 620
  • This is not a HUD Guidelines but rather a lenders overlay on the particular lender
  • FHA only requires a 580 credit score
  • Borrowers who fall short of the minimum required credit score, there are quick fixes to boost credit scores up
  • Any experienced mortgage loan originator can assist borrowers in boosting credit scores

Maximum Loan Limits On FHA 203k Loan Programs

There are maximum loan limits with FHA loan programs:

  • The maximum FHA amounts can reach $679,650 on single family homes in high cost areas, especially in California, and New York
  • Most areas in California, such as Los Angeles, San Diego, Irvine, Pasadena, LaJolla, San Francisco, San Jose, Monterey, and Lake Tahoe fall in high cost areas and FHA Loan Limits is $679,650 on single family homes

All 203k loan sizes cannot exceed a property’s after improved value by more than 10%.

What Types Of Work Are Allowed With FHA 203k Loan Programs?

Both the FHA 203k Streamline and FHA 203k Standard mortgage loan programs has its own guidelines on what types of work is permitted and what types of work that is not permitted.

  • For the 203k Standard rehab loan program, the types of work that is permitted is very broad
  • Buyers can do the following
    • room additions to home
    • can do a gut rehab on the home
    • can do a two story addition to home
    • structural changes can be made
    • major landscaping is permitted
    • foundation extensions are permitted
    • There is no limit on the construction budget amount with Standard FHA 203k loan programs as long as the after improved appraised value does not exceed the maximum FHA  lending limit
    • Homeowners can over improve and have a higher appraised value
    • But homeowners would have to come up any extra funds that go beyond the maximum FHA lending limits

FHA 203k Streamline Rehab Loan

For properties needing minor repairs and the cost of construction of $35,000 and under, the mortgage loan borrower can select the FHA 203k Streamline loan.

  • The type of work that can be done with a FHA Streamline mortgage loan program is much more restrictive
  • The homeowner cannot do any structural changes to the existing home
  • Room additions are not allowed
  • Work that is permitted are the following
    • kitchen and bathroom remodeling
    • finishing an existing attic and basement
    • roofing, new windows
    • repairs that do not require structural changes
    • patios and porches
    • new siding, weatherization
    • updating mechanicals such as HVAC, electrical, and plumbing, painting
    • new appliances that is attached to the property and not mobile units

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