This BLOG On FHA 203k Home Loans Mortgage Lending Guidelines Was UPDATED On April 17th, 2019
FHA loans are government-insured mortgage loans issued by private lenders. FHA is not a mortgage company nor does it fund any mortgage loans. The United States Department of Housing and Urban Development (HUD) is the parent of FHA.
- FHA insures owner-occupant residential home loans to private mortgage lenders
- Lenders need to be approved by HUD
- FHA lenders need to follow the FHA mortgage lending guidelines
- FHA loans are the most popular loans in the United States
- This is due to the fact that it only requires a 3.5% down payment for home buyers
FHA Loans have flexible mortgage lending guidelines with regards to:
- credit
- debt to income ratios
- collections and charged-off accounts
- prior bankruptcy and foreclosure
- allows multiple non-occupant co-borrowers
In this article, we will cover and discuss qualifying for FHA 203k Renovation Loans.
HUD Property Condition Guidelines
- However, FHA does have strict guidelines when it comes to appraisals and property conditions
- A person cannot qualify to purchase a property that is in need of repairs or not habitable
- The property needs to meet general FHA guidelines
- FHA requires that the subject property be in habitable condition
HUD Guidelines are very strict with regards to:
- peeling paint
- broken windows
- non-working electrical, plumbing, and HVAC systems
- other defects in the property
Defects On The Subject Property
If a home appraiser notes defects in the property, the appraiser will note it on a home appraisal report:
- The home buyer and/or home seller needs to correct the issues
- A re-inspection needs to be done before the mortgage lender can accept the appraisal and go forward with the mortgage application and approval process
- In the event, if the defects are very minor, then it presents no issues and an appraisal re-inspection can be done and the mortgage application and approval process can move forward
- However, if the home has major issues such as needing the following:
- new roof
- new windows
- new flooring
- new HVAC systems
- new appliances
- other major repairs
- Then the home buyer has the option of getting FHA 203k Home Loans
What Are FHA 203k Home Loans?
An FHA 203k Loans are an acquisition and construction loan that is combined as a one loan package:
- Everyone who qualifies for the standard FHA loan program can qualify for FHA 203k Home Loans
- There are Streamline FHA 203k Loans which are for cosmetic repairs and maximum construction budget is capped at $35,000
Standard FHA 203k Loans have no construction limit but the acquisition and construction loan is capped at the max FHA Loan Limit on the county the property is located.
Basics Of FHA 203k Home Loans
- The Federal Housing Administration does not fund loans
- The Federal Housing Administration insures owner occupant home loans to private lenders
- Purpose of FHA is to promote private lenders to fund higher-risk home loans to buyers
- FHA will guarantee these FHA approved mortgage lenders against losses in the event borrowers defaults
- The basics of FHA 203k Loans is to enable the home buyer to purchase non-habitable properties in need of repairs
- Homes that will not pass FHA housing standards or fixer-uppers are perfect for FHA 203k Loans
- Enables home buyers to purchase a home that is in need of repairs
- FHA 203k Loans enables a home buyer to purchase a fixer-upper
- FHA 203k Loans will not only fund the cost of the home but also the cost of the repairs all in one loan closing
FHA 203k Home Loans also enables a homeowner who has a home that needs rehabilitation to refinance their current home and get the funds to remodel their homes.
Types Of Work Allowed With FHA 203k Home Loans
There are two types of FHA 203k Home Loans:
- Streamline FHA 203k Loans which are for minor cosmetic repairs such as:
- Windows
- Siding
- Interior remodeling
- Roofing
- Basements and attics
- Appliances
- HVAC
- Millwork and Flooring
- General repairs not needing structural changes to the home
- Maximum budget of $35,000
- Standard FHA 203k Home Loans which allows full construction with no construction budget:
- Room additions
- basement and attic remodeling
- bathroom and kitchen remodeling
- new roofing
- new windows
- new gutters
- electrical systems
- plumbing systems
- HVAC systems
- appliances
- other major repairs can be funded with FHA 203k Home Loans
- All FHA 203k Home Loans need to be an owner-occupant
- Properties eligible are one to four-unit residential properties
FHA 203k Streamline Loans
There are two different types of FHA 203k Loan programs:
- FHA 203k Streamline and FHA 203k Standard
- The FHA 203k Streamline program is a simple remodeling loan program where the maximum amount that FHA will allow is $35,000
- No structural changes can be done with the Streamline 203k Loan program
- No room additions or changes of structural walls are allowed
- Homeowners can remodel your basement, attic, kitchen, and bathrooms with the 203k Streamline Loan program
- New windows, new roof, new flooring, new millwork, new drywall, electrical, plumbing, and HVAC systems can be done with the 203k streamline loan program
Standard FHA 203k Loan program
The standard FHA 203k Loan program is for homebuyers who need a full-blown rehab.
- Homeowners are allowed to do
- room additions
- structural changes
- second story additions
- Cost of construction is unlimited up to the maximum FHA loan amount in the county property is located
- For example, if the FHA loan maximum loan amount for a particular county is $365,700 ( Cook, Lake, Will, Dupage Counties in Illinois ) then borrowers can borrow up to that loan amount for both the purchase and construction of the property
- Buyers purchasing a fixer-upper for $100,000 in Cook County, Illinois
- The county maximum FHA lending limit is $365,700
- Construction budget will be a maximum of $265,700 ( $100,00 cost of the home plus $265,700 yields the maximum $365,700 FHA lending limit in Cook County, Illinois)
Eligibility For FHA 203k Home Loans
Not all mortgage lenders offer FHA 203k Home Loans even though they may offer regular FHA loans to their mortgage applicants. Borrowers need a 3.5% down payment for the after repair value of the property. For example, if the cost of the home purchase is $100,000 and the cost of construction is $100,000, borrowers would need 3.5% of the after repair value of the property which is 3.5% of the $200,000 which is $7,000.
FHA 203k Loan mortgage rates are normally higher than regular FHA loan programs. It also takes longer to close an FHA 203k Loan compared to a regular FHA loan. There are more costs incurred with an FHA 203k Loan than there is with the regular FHA loan. Costs for home inspection and permits can be quite costly. However, these costs can be rolled into the FHA 203k loan balance.