Click question for answer.
- What is an FHA loan?
The FHA does not actually provide mortgage funds, but instead provides lenders with insurance that protects them against losses in the event of homeowner mortgage default. This reduces the lenders’ risk, allowing them to offer loans to buyers with less than perfect credit and with lower down payments. Lenders must follow specific guidelines established by FHA to assure qualification for insurance.
- What is a FHA 203(k) loan?
An
FHA 203(k) loan is basically the same as a regular FHA [called a 203(b)], but with a twist. An FHA 203(k) loan permits homebuyers to finance repair/improvement money into their mortgage to repair, improve or upgrade their home.
- What properties qualify for an FHA 203(k) loan?
An FHA 203(k) Loan can be used for one-to-four unit dwellings, such as Single Family Detached Homes, Duplexes, Triplexes, 4-plexes, Condominiums and Mixed-Use Residential (certain restrictions apply).
- Why hasn’t my lender told me about the FHA 203(k) Renovation Loans?
Most lenders are not familiar with the unique requirements of processing FHA renovation loans or have had difficulty having them funded. Visit our
Contact a Lender page to see a list of lenders experienced processing these types of loans.
- What types of repairs and/or upgrades are acceptable for an FHA 203(k) loan?
Any repairs/improvements/modifications/modernizations that add value to and/or improve the property are acceptable for an FHA 203(k) Loan. The improvements must comply with
HUD’s Minimum Property Standards (24 CFR 200.926d and/or HUD Handbook 4905.1) and all local codes and ordinances. Structural modifications and any work in excess of $35,000 are
NOT allowed for the FHA 203(k) Streamlined Loan, but the FHA 203(k) Rehab does allow for structural modifications and for work in excess of $35,000. Landscaping and luxury items such as BBQ’s, Gazebos, spas, etc. are not allowed for any 203(k) loan. However, limited pool repair (max $1500-subject to lender approval) is allowed under both versions of the FHA 203(k) loan (subject to lender approval).
- Can I do the renovation work myself?
Where a buyer can demonstrate professional expertise in a given activity, it is allowable. However, the borrower cannot be paid for labor, only materials used. Prior to loan approval, the cost estimate must reflect the cost for a contractor to do the work in the event the borrower is unable.
- Is there a maximum or minimum repair amount for an FHA 203(k) loan?
FHA 203(k) Streamline: no minimum – $35,000 maximum* FHA 203(k) Standard/Full: $5,000 minimum – no pre-set maximum* *The maximum is always limited by lesser of the borrowers approval limit, the FHA maximum mortgage limit for the area or 110% of the improved appraised value.
- How can I get an all inclusive cost summary for renovations and required repairs?
Call Hybrid Homes and request a property inspection.
- What is an approved 203k Contractor?
Because neither HUD nor FHA approves, certifies or endorses contractors for the 203(k) loan program, there is no such thing as an FHA approved contractor for the FHA 203(k) loan. Instead, HUD/FHA requires lenders to “approve” contractors, which means that the lender must review the contractor’s credentials, work experience, licensing information, type of work performed, client references and experience.
- How long will it take after closing until I can move into my new home?
The renovation time line varies, according to the extent of work required on a property. Usually a new home will be move-in ready in about 3 weeks, but extensive renovation can take up to 3 months.
- What access will we have to our new home during renovation?
Establishing the scope of work prior to close of escrow allows us to be fully prepared to start the rehab immediately after the sale records and to stay on the job with multiple crews through completion. This approach is most cost efficient. Having full access eliminates intrusion or scheduling challenges, and we pass this savings on to you. Once the scope of work is finalized we will commit to a job completion date as part of the written contract agreement, so you can accurately schedule our walk through and your move-in date.
- How much money will I need as a down payment to use this program?
Standard FHA loan requirements include a 3.5% down payment of the total cost of the loan: purchase price + renovations.
- Can I finance my existing mortgage into an FHA 203(k) loan?
Yes, you can refinance your existing mortgage into an FHA 203(k) loan. The FHA 203(k) Streamlined loan is also available for mortgage refinance transactions including those where the property is owned free-and clear. Only credit-qualifying “no cash out” refinance transactions with an appraisal are eligible for the FHA 203(k) Streamlined Loan. If the borrower has owned the property for less than a year, the acquisition cost must be used to determine the maximum mortgage amount.
- What are FHA loan limits?
The FHA sets limits on the maximum amount of loan funds available to a borrower relative to housing costs in a given area. In areas of the country with lower home values, limits are currently set at a maximum of $271,000 while in other areas these limits go as high as $729,750. Even if your credit worthiness and income would allow you to afford a larger mortgage, your lender will not allow you to exceed the regional limits established for an FHA loan. To determine the current limits for your area, visit
https://entp.hud.gov/idapp/html/hicostlook.cfm.
- How is the home appraised?
The appraiser is given a copy of the contractors bid documents to identify the repairs and remodeling to be done along with their costs. The appraiser then determines the value of the home after completion, “subject to” the improvements to be made. In some cases, up to 110% of this value may be used for loan approval purposes.
- Is the 203k program allowed for use by investors?
A 203k loan can be used only by owner occupants, local governments or eligible non-profits. However, an owner occupant can use a 203k loan to purchase and renovate up to a 4-unit building as well as multi-use building in conformance with certain guidelines.
- Can an Energy Efficient Mortgage (EEM) be used in conjunction with the 203k?
Yes – the FHA allows the use of an
EEM, which provides funds beyond the FHA loan limits and the buyers approved loan amount for improvements that increase the energy efficiency and lower the utility costs of the home. An energy audit must be conducted by an approved home energy rater to assure that the energy savings over the useful life of the improvements will exceed their costs. The total amount of an EEM mortgage can be up to 5% of the value of the property.
- How are loan funds disbursed for the purchase and renovation?
At the loan closing, funds are disbursed for the home purchase and, based on previously submitted and accepted contractor bids, renovation funds are placed by the lender in an escrow. These renovation funds are then paid in draws to the contractors as the work proceeds with final payments following inspection at completion. The actual disbursement schedule, inspections and paperwork required are determined by the lender for each project and in conformance with FHA guidelines.
- What if there are extra funds after renovation?
Any funds left over following completion of the renovation can be used to make additional allowable improvements to the property. If not used for this purpose, left over funds will be applied to pay down the principal balance of the mortgage.
- Is there a time limit for the renovation?
The renovation must begin within 30 days of the closing of the loan and must be completed within the time frame established in the loan agreement. The total time for renovation must not exceed six months.
- What if the home is not habitable during renovation?
The Standard 203k loan does allow for up to six mortgage payments to be included in the renovation funds to cover the period when the home is uninhabitable during renovation. A Streamline 203k, however, cannot be used if the home will not be habitable at any time during the renovation.
- How long do I have to complete the renovation?
Work must begin within 30 days of closing, cannot stop for periods greater than 30 days and must be completed within six months. Certain programs allow up to nine months if the cost of repairs exceeds $50,000.
- What happens if something goes wrong while the repairs are in progress, like a pipe breaks or rotted wood is discovered?
A contingency reserve is either collected or financed to pay for any unforeseen repairs. A change order form needs to be completed, signed by all parties and sent to the Draw Center for approval prior to the additional work being completed. Once the change order is approved, the necessary work can then be completed and funds will be released after the completed work is inspected.
- What happens to the contingency reserve if it is not used by the end of the renovation?
It can either be used to do additional repairs, if approved by the Draw Center, or applied to the principal balance of the loan. If the customer did not finance the contingency reserve, it can be refunded in cash.
- If I don’t use all the money set aside for the repairs, can the money be given back to me in cash?
If unused funds remain in the renovation escrow account when all work is complete, money for repairs, clearly identified as being paid in cash by the customer during the renovation phase, may be given back. All financed renovation funds must be applied to the principal balanced of the loan if not used for additional repairs at completion.
- Will I need an inspection of the repairs/improvements?
For repairs in excess of $15,000, the Lender must perform or obtain an inspection of the completed work by a third party. For repair costs not exceeding $15,000, the Lender is not required to perform or obtain inspections of the completed work; however the Lender may choose to. Lenders may also ensure that the repairs and/or improvements have been completed by obtaining contractor’s receipts or by a signed Mortgagor’s Letter of Completion. When not exceeding $15,000, the Lender may accept receipts or proof of completion of the work to the homeowner’s satisfaction from the contractor. Before a final release is made, the home owner must sign a statement acknowledging that the work has been completed in a professional and satisfactory manner.
- Can a 203(k) be use to improve a condominium unit?
Yes, however condominium rehabilitation is subject to some conditions. Owner/occupant and qualified nonprofit borrowers only. Rehabilitation is limited only to the interior of the unit. Only the lesser of five units per condominium association, or 25 percent of the total number of units, can be undergoing rehabilitation at any one time. After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units. Multiple buildings each containing four or fewer units can be eligible for 203(k).
- Can a six or more unit building be rehabilitated using the 203(k)?
No. However, the building could be renovated and reduced to a four unit building.
- Can a not residential (storefront) property be eligible for a 203(k) loan?
Yes. Mixed-used residential property is eligible provided the property has no greater than 25% (for a one story building); 33% (for a three story building); and 49% (for a two story building) of its floor areas used for commercial purposes. The rehab funds can only be used for the residential functions of the dwelling and areas used to access the residential part of the property.
- Can a local government agency or a non profit organization use the 203(k) program?
Yes. The same qualification requirements will be used as for an owner-occupant of the property.
- Can a dwelling be converted to provide access for a disabled person?
Yes. A dwelling can be remodeled to improve the kitchen and bath to accommodate wheelchair access. Wider doors and handicap ramps can also be included in the cost of rehabilitation.
- Can I use the proceeds from a 203(k) loan to fix my roof?
Roof repair or replacement can be done on all FHA approved properties except condominiums. FHA requires roof replacement if the property’s roof has less than 3 years of economic remaining life as determined by the appraiser.
- Is it required to have 2 separate bids from 2 separate contractors?
No. It is an “overlay” requirement unique to Bank of America Retail that the buyer obtain 2 bids from 2 separate contractors, it is not a HUD/FHA requirement nor do any other lenders require this. We encourage Home Buyers, Loan Officers & Realtors to identify with the valuable service and expertise in facilitating the this intricate loan product from the contractor side that Hybrid Homes provides to assure successful on-time closings, 100% customer satisfaction and a referral pipeline.
