Rehab Loans for Fixer-Uppers

Homebuyers of dilapidated properties face two challenges that keep most buyers away: worrying about how to get a loan from tight-fisted lenders and fretting about how to pay for the rehab.

Now there’s a way to do both without dipping into your savings or your retirement funds. The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), offers loans covering both the renovation costs as well as the purchase price of a primary residence — all for  just a 3.5 percent down payment.

But there’s one exception — investors need not apply.

The FHA’s 203(k) renovation loan, also known as the FHA rehab loan, is HUD’s primary program for the rehabilitation and repair of single-family properties. The 203(k) loan is like a construction loan, with the first draw of the mortgage money going to buy the house and put the deed in the new owner’s name. Then subsequent draws are made to pay the contractor for rehabilitation work as it is completed. The FHA 203(k) loan was designed for individuals who want to rehabilitate or repair a damaged home so they can live in it as their primary residence.

The loan can also include a 10 to 20 percent contingency reserve for expenses above and beyond your repair estimates.

“The FHA’s 203(k) renovation loan is a fantastic program,” said Dennis Walsh, CEO of REbuild USA, a Newport Beach, Calif., company that trains lenders and realtors on how to help borrowers with the HUD program. “It’s one of the best kept secrets in mortgage lending.”

Although the rehab loan program has been around since 1978, not many buyers are familiar with the program, and many borrowers mistakenly think they have to buy a dump in order to qualify. They don’t, Walsh said. He said the hybrid loan has been around for more than 30 years, and the loan program has recently surged in popularity with the rise in foreclosure activity.

“We are seeing an explosive growth in these loans,” said Walsh.

Demand for 203(k) financing has been on the rise. The demand is being fueled by increasing foreclosure inventories, distressed sales and short sales. In 2007, there were 3,255 of the 203(k) loans made. By 2012, they had ballooned to 23,000, according to HUD.

“When you consider that 5 million homes are sold each year, you have to ask yourself: Why aren’t more people taking advantage of this great program?” wondered Walsh. “And when you consider that 85 percent of the homes in America are 20 years or older, this 203(k) financing program makes a lot of sense.”

John Adams, national renovation manager at Prospect Mortgage, the third largest FHA 203(k) renovation lender in the nation, said there are two types of FHA 203(k) mortgages: the streamlined and standard versions. Standard 203(k)s are for properties that need structural repairs; streamlined cover non-structural repairs.

The streamlined version requires a 3.5 percent down payment, covers up to $35,000 in non-structural renovations and repairs and does not involve a lot of paperwork.

The standard version has the same down-payment requirement, but no restrictions on how much of the loan can be used on repairs and renovations. The catch is the paperwork, which includes a detailed proposal showing the scope of work to be done and a cost estimate for each repair, along with an inspection of the house and an appraisal.

For both types of loan, the contractor has six-months to complete the work. Both have a ceiling of about $730,000 for the purchase price and repairs, minus the down payment.

“Working with an experienced renovation lender is what you need to make the loan process go smoothly and close on time,” said Adams, who has personally closed over 1,000 renovation loans, primarily FHA 203(k).

The FHA 203(k) loans, which are not available to investors, generally come with higher fees and interest rates than home equity loans, because they carry FHA insurance. The interest rate is typically a percentage point higher than conventional loans, and come in 15- to-30 year terms, either fixed or adjustable. Homebuyers must use a HUD-approved lender, appraiser and contractor approved by the lender for the repairs. A list of the approved businesses can be found at

The renovation part of the loan can be used for everything from new floors or appliances to solar panels and major structural rehabilitation.

Loan limits vary geographically, and range from $271,050 to $729,750. The federally-backed loan is insured by HUD.

A wide variety of repairs and improvements can be financed with 203(k) loan, including, but not limited  to the following rehabs: 

  • Room additions
  • Decks
  • Painting 
  • Patios
  • Bathroom remodeling
  • Kitchen remodeling, including appliances
  • Finishing an attic or basement
  • Structural alterations and repairs
  • Turning a single-family into duplex
  • New siding
  • Second story addition
  • Heating and air conditioning systems
  • Plumbing
  • Roofing
  • Flooring

A few “luxury items” are no  allowed, including swimming pools, hot tubs, barbecue pits and tennis courts, but solar panels are actually allowed.

There are whispers that the 203(k) rehab loans will be extended to investors

FHA 203(k) Requirements
FHA’s policy requires property buyers to comply with a detailed list of standards. Among the most prominent:

  • 203(k) loans are only for owner-occupants; this loan is not available to investors.
  • Find a lender who specializes in 203(k) rehab loans.
  • Borrowers must meet typical FHA mortgage loan requirements in terms of your credit score.
  • Down payment of 3.5 percent
  • If you are refinancing, your loan-to-value must be at least 97.5 percent.
  • FHA 203(k) loan interest rates typically are slightly higher than standard FHA mortgage rates.
  • The total mortgage loan amount — sale price and repairs — must be under the maximum FHA loan limit for your area.
  • You will need to pay mortgage-insurance.

All persons who can make the monthly mortgage payments are eligible to apply for a 203(k) loan, according to the FHA. To find a lender in your area who is experienced with FHA 203(k) mortgages, use the search tool at and check the box for 203(k).

HUD outlines the rules on its Web site. (

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