Renovation Loan FAQ

What is the FHA?
What is an FHA loan?
How is the FHA funded?
What are the benefits of an FHA loan?
What are FHA loan limits?
What is an FHA 203(k) loan?
FHA 203(k) loans are available in two types:
What improvements are eligible under the Streamlined 203(k)?
What items are ineligible for the Streamlined 203(k)?
Can the 203(k) program be only used on single-family homes?
How is the home appraised?
Can a 203(k) be used to purchase a HUD-owned property?
Is the 203(k) program available to investors?
Can an Energy Efficient Mortgage (EEM) be used in conjunction with the 203(k)?
How are loan funds disbursed for the purchase and renovation?
Is a borrower allowed to do the rehabilitation work?
What if there are extra funds after renovation?
Is there a time limit for the renovation?
What if the home is not habitable during renovation?

 

What is the FHA?

The U.S. Federal Housing Administration (FHA) was established in 1934 to improve housing conditions and ownership opportunities for Americans. Since that time, the FHA loan programs have been used to finance more than 34 million homes.

During the 1940’s, the FHA played a major role in housing our military as well as returning veterans and their families. In 1965, the FHA was set up under the management of the U.S. Department of Housing and Urban Development (HUD) and went on to deliver programs leading to the construction of millions of apartments to meet the needs of the elderly, handicapped and lower income Americans.

Today, FHA-insured loans increase in popularity as more and more Americans become aware of the benefits of this powerful U.S. government-backed program.

 

What is an FHA loan?

The FHA is not a lender. Instead the agency provides lenders with insurance that protects them against losses in the event of a homeowner’s mortgage default. This reduces the lender’s 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, however, to assure that their loans qualify for insurance.

 

How is the FHA funded?

The FHA is funded entirely by proceeds from mortgage insurance premiums that are included as part of the borrower’s  mortgage payments. As a result, the FHA is the only government agency that is entirely self-funded – operating at no cost to American taxpayers. Additionally, the home construction and community development driven by FHA programs stimulate the economy through job creation, tax revenues and more.

 

What are the benefits of an FHA loan?

The FHA identifies the following benefits:

  • Low cost — FHA-insured loans have competitive interest rates because the federal government insures the loans for lenders.
  • Smaller down payment — FHA-insured loans have a low 3.5% down payment and the money can come from a family member, employer or charitable organization as a gift.
  • Easier qualification — Because FHA insures the mortgage, lenders may be more willing to give borrowers loan terms that make it easier to qualify.
  • Less than perfect credit — Perfect credit is not required to get an FHA-insured mortgage. In fact, even if the borrower has had credit problems such as a bankruptcy, it’s easier for him to qualify for an FHA-insured loan than a conventional loan.
  • More protection to keep their home — The FHA has been helping people since 1934. Should the homeowner encounter hard times after buying the home, the FHA has many options to keep the homeowner in their home and avoid foreclosure.

 

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 the borrower’s creditworthiness and income would allow him to afford a larger mortgage, the lender will not allow the borrower to exceed the regional limits established for an FHA loan. To determine the current limits in a particular area, visit https://entp.hud.gov/idapp/html/hicostlook.cfm.

 

What is an FHA 203(k) Loan?

The FHA 203(k) renovation loan program provides funds for both the purchase and renovation of a home packaged into a single mortgage loan. Once the purchase of the home is closed, renovation funds are held in escrow to pay for pre-determined renovation work done by approved renovation contractors.

The purchase of a house in need of repair is often a catch-22 situation, because the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.

HUD’s 203(k) program can help overcome this obstacle by enabling the borrower to borrow funds for the purchase or refinance of a property plus the cost of making the repairs and improvements all in one mortgage. The FHA-insured 203(k) loan is provided through approved lenders nationwide and is available only to owner-occupants.

Down payment, credit qualification, loan limits and other requirements are the same as standard FHA loans. Additional guidelines are set forth specific to 203(k) loans to provide for renovation of the home.

 

 

FHA 203(k) loans are available in two types:

    1. The Standard 203(k) is intended for more complicated projects that involve structural changes, such as room additions, exterior grading and landscaping, or renovation that would prohibit the owner from occupying the residence. A Standard 203(k) is also used if the project requires engineering or architectural drawings and inspections.
    2. The streamlined 203(k) is designed for less extensive improvements and for projects that will not exceed a total of $35,000 in renovation and related expenses. This version does not require the use of a consultant, architect, and engineer or as many inspections as the Standard 203(k). As a result, when applicable, the Streamlined 203(k) generally becomes the simpler, less costly option.

 

What improvements are eligible under the Streamlined 203(k)?

The Streamlined 203(k) program is intended to facilitate uncomplicated rehabilitation and/or improvements to a home for which plans, consultants, engineers and/or architects are not required. This program allows discretionary improvements and/or repairs shown below:

      • Repair/Replacement of roofs, gutters and downspouts
      • Repair/Replacement/upgrade of existing HVAC systems
      • Repair/Replacement/upgrade of plumbing and electrical systems
      • Repair/Replacement of flooring
      • Minor remodeling, such as kitchens, which does not involve structural repairs
      • Painting, both exterior and interior
      • Weatherization, including storm windows and doors, insulation, weather stripping, etc.
      • Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
      • Accessibility improvements for persons with disabilities
      • Lead-based paint stabilization or abatement of lead-based paint hazards
      • Repair/replace/add exterior decks, patios, porches
      • Basement finishing and remodeling, which does not involve structural repairs
      • Basement waterproofing
      • Window and door replacements and exterior wall re-siding
      • Septic system and/or well repair or replacement

 What items are ineligible for the Streamlined 203(k)?

Properties that require the following work items are not eligible for financing under the Streamlined 203(k):

      • Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;
      • New construction (including room additions);
      • Repair of structural damage;
      • Repairs requiring detailed drawings or architectural exhibits;
      • Landscaping or similar site amenity improvements;
      • Any repair or improvement requiring a work schedule longer than six (6) months; or
      • Rehabilitation activities that require more than two (2) payments per specialized contractor.

Mortgagors may not use the Streamlined 203(k) program to finance any required repairs arising from the appraisal that do not appear on the list of Streamlined 203(k) eligible work items or that would:

      • Necessitate a “consultant” to develop a “Specification of Repairs/Work Write-Up”;
      • Require plans or architectural exhibits;
      • Require a plan reviewer;
      • Require more than six months to complete;
      • Result in work not starting within 30 days after loan closing; or cause the homeowner to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted. (FHA anticipates that, in a typical case, the homeowner would be able to occupy the property after mortgage loan closing).

 

Can the 203(k) program be only used on single-family homes?

The 203(k) loan program is eligible for use on single family homes as well as on 1- to 4-unit buildings; including the conversion of a building from a larger number of units down to 4 or less. Following specific guidelines, the 203(k) mortgage can also be used on a condominium unit for improvement of the interior only. The program also allows for financing mixed-use building projects that combine retail or commercial space with residential space. In these cases, the 203(k) loan can only be used for renovation of the residential portion of the building.

 

How is the home appraised?

The appraiser is given a copy of the contractor’s bid documents to identify the repairs and remodeling to be done along with the respective 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 after-improved value may be used for loan approval purposes.

 

Can a 203(k) be used to purchase a HUD-owned property?

A 203(k) loan can be used to purchase a HUD-owned property that is determined by HUD to be eligible for the program. If other funds are used for the purchase, a 203(k) loan can be made up to six months following the purchase, allowing cash back to the owner.

 

Is the 203(k) program allowed for use by investors?

A 203(k) 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 203(k)?

Yes, the FHA allows the use of an EEM, which provides funds beyond the FHA loan limits and the buyer’s 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 closes, 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 account. These renovation funds are then drawn from that account to pay 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.

 

Is a borrower allowed to do the rehabilitation work?

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.

 

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 203(k) 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 streamlined 203(k), however, cannot be used if the home will not be habitable at any time during the renovation.

Homebuyers and Homeowners

The parameters of FHA’s 203(k) mortgage insurance program are set up in a way that both homebuyers and current homeowners can take advantage of its many benefits so long as they qualify under the provisions of the program.