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 However, the house may be too small, outdated, not have enough bedrooms, not have enough bathrooms, need new mechanical systems, need a new kitchen, need new roofing, need new windows.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.

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

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.

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.

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.

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

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.

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.

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.

What Credit Score do you Need for a FHA Loan?

To qualify for a low down payment option on an FHA loan in 2024, lenders usually mandate a credit score of 580 or higher. For credit scores between 500 and 579, an FHA loan is still possible but requires a minimum down payment of 10%.

These are the FHA guidelines; individual lenders may have stricter standards, and some might require a higher credit score. Discover the best loan options by comparing lenders’ requirements with your credit score. Enjoy better terms and rates with a higher score.

Lenders typically allow a maximum debt-to-income (DTI) ratio of 43% when applying for an FHA loan. In some cases, lenders may accept a higher DTI ratio of up to 50%, particularly if compensating factors like a good credit score or substantial reserves exist.

Lenders rely on the DTI ratio to evaluate a borrower’s capacity to handle monthly payments and repay debts. It is calculated by dividing the total of all monthly debt payments by the borrower’s gross monthly income.

It’s important to check with specific lenders as they might have their own requirements or overlays that affect the maximum allowable DTI ratio for FHA loans.