What is a Renovation loan?

The FHA 203(k) Renovation loan allows the borrower, either a buyer or a current home owner, to finance the cost of improving an existing 1-4 unit property into one loan at a long term fixed or adjustable rate.  The mortgage amount is based on the projected value of the property with the work completed. Basically, this means you can buy or refinance the property and fix it up with one loan.

The FHA 203k program is used to make improvements to an existing property. They can be used to make simple up-grades to a home, such as a kitchen or bath improvement, or to completely re-construct a home that is presently un-livable. They can also be used to tear down an existing structure and re-build a new one using some portion of the existing foundation.

For example, let’s assume that you are purchasing a home for $500,000 and wish to invest an additional $50,000 to renovate it. Traditional loan programs will lend you the funds to purchase the home but will not advance additional funds to renovate it. This program will finance both the purchase and renovation of a property.

The FHA 203(k) loan offers flexible qualifying and low down payments:

FHA down payment (3.5%)
Flexible credit qualifying (620 FICO and above)
Assumable loans
Purchase and Improve all in one loan
Made available to certain lenders by the U.S. Department of Housing and Urban Development (HUD), the FHA 203(k) program has already provided many buyers with the funds necessary to buy their first home, or greatly improve a move-up home. The FHA 203(k) loan is available to borrowers of all income levels, to homeowners who plan to occupy the house, and for homes with one to four units.

203K Eligible Borrowers:
Owner Occupants – Purchase – Refinance
U.S citizens
Non-Occupant co-borrowers
Inter vivos revocable trusts
Permanent resident aliens
Non-permanent resident aliens
Eligible Properties:
Single family dwellings that have been completed for at least one year.
Mixed Use (Storefront)
1-4 Unit attached – you can increase or decrease the number of units with this loan.
Structural Alteration and Reconstruction:
Changes for improved functions and modernization
Elimination of health/safety hazards
Changes for aesthetic appeal
Plumbing, heating air conditioning, and electrical upgrades
Well and/or septic repairs
Roofing, gutters and downspouts
Flooring, tiling and carpeting
Energy conservation improvements
Major landscape work and site improvement
Home Inspection:
The cost of your construction is estimated by an FHA Approved 203(k) consultant (estimator). The cost consultant assists you in determining the scope of repairs and the costs budgeted for the renovation job.

Perform a home inspection to create preliminary costs estimates based upon FHA minimum property standards plus the scope of work as defined by the home owner/buyer.
Once project has been determined, the cost consultant prepares a “work-write up” and 3 contractor bid packages are issued to the home owner/buyer.
The appraiser will be given a copy of your “work-write up” to estimate an after improved value for your new home or current home. We loan against that improved value thus giving you credit for the work to be performed.
Other Eligible Costs:
Contingency reserve (10%-20%)
Up to 6 months PITI mortgage payments
Permit costs
Consultant fees
Inspection and title update fees
Architectural & Engineering fees (if needed)
203(k) home buying process:
Homebuyer locates the property.
Homebuyer and their real estate professional should determine the extent of the rehabilitation work required, the rough cost estimate of the work and the expected market value of the property after completion of the work.
Sales contract is executed. A provision should be included in the sales contract that the buyer has applied for Section 203(k) financing, and that the contract is contingent upon loan approval and buyer’s acceptance of additional required improvements as determined by HUD or the lender.
Homebuyer selects a lender.
Homebuyer prepares work write-up and cost estimate.
Plan reviewer visits the property
Appraiser performs the appraisal
Issuance of Conditional Commitment/Statement of Appraised Value
Lender issues firm commitment
Mortgage loan closing
Rehabilitation construction begins
Releases from rehabilitation escrow account
Completion of work/Final inspection