FHA 203k Loan Programs


What Is A FHA 203k Loan?

gustan-cho-mortgage-lender-building-smallestIf you are planning on buying a home that needs renovations or if you currently own a home and the home needs work, HUD’s FHA 203k Loan may be the solution.  Getting a construction loan these days is extremely difficult and many construction loan lenders will make you go through red tape.  Getting a second mortgage and/or home equity line of credit requires equity in your home as well as credit scores of over 700 FICO.  For home buyers who are planning on purchasing a foreclosure, short sale, or REO in dire need of rehab.  FHA 203k Loan programs allow home buyers and homeowners get a construction loan and mortgage loan in one single home loan with no hassles.  FHA 203k Loans are available only to owner occupant homeowners and 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.  FHA launched the FHA 203k Loan program 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 203k Loan programs are for acquisition and construction purposes and no cash-out is allowed.

How Can I Qualify For A FHA 203k Loan?

Since 203k Loans are FHA insured loans, the same FHA lending guidelines apply with 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 FHA.  Some mortgage lender overlays with 203k Loan programs imposed by 203k mortgage lenders may be higher credit scores, reserves, and lower debt to income ratios.  FHA 203k mortgage rates are normally 0.50% higher than standard FHA loans.

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 and 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 FICO credit score.  Most 203k mortgage lenders want to see a minimum credit score of 620 FICO.  If you fall short of the minimum required credit score, there are quick fixes to boost your credit scores up and any experienced mortgage loan originator can assist you in boosting your credit scores.

There are maximum loan limits with FHA loan programs.  The maximum FHA amounts can reach $625,000 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.

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?

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.  You can do room additions to your home, you can do a gut rehab on the home, you can do a two story addition to your home, structural changes can be made, major landscaping is permitted, foundation extensions are permitted.  There is no limit on the construction budget amount with the FHA 203k Standard mortgage loan program as long as the after improved appraised value does not exceed the maximum FHA mortgage lending limit.  You can over improve and your home can have a higher appraised value but you 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 kitchen and bathroom remodeling, finishing an existing attic and basement, roofing, new windows, repairs that do not require structural changes, patios and porchses, new siding, weatherization,  updating mechanicals such as HVAC, electrical, and plumbing, painting, and new appliances that is attached to the property and not mobile units.

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