The U.S Federal Housing Administration (FHA) 203k renovation loan program provides buyers or refinancing households the funds for both the purchase and renovation of a home packaged into one 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 that needs 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. Now that’s a predicament!
The U.S Department of Housing and Urban Development’s (HUD) 203k program can help you overcome this obstacle by enabling you 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 203k loan is provided through approved lenders nationwide and is available to owners who will occupy the home themselves.
Down payment, credit qualification, loan limits and other requirements are the same as standard FHA loans. Here are some guidelines specific to 203k loans:
Which Home Repairs Qualify for a FHA 203k Loan?
There are two main types of FHA 203k mortgage loans. The first is the regular or standard 203k, which is given for properties that need things like structural repairs, remodeling, a new garage, or landscaping; the second is the limited or streamlined 203k, which is given for energy conservation improvements, new roofing, new appliances, or non-structural repairs such as painting.
Among the other repairs that an FHA 203k will cover:
- bathroom and kitchen remodels
- new siding
- additions to the home such as a second story
- heating and air conditioning systems
- And more
The program will not cover so-called “luxury” improvements such as adding a tennis court or pool to the property. It also does not cover any improvement that does not become a permanent part of the property.
How is My Home Value Appraised After Remodeling and Repairs?
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.
How Are Loan Funds Disbursed for the Home 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 Are the Pros and Cons of 203k FHA Mortgage Loans?
The main benefit of these loans is that they give you the ability to buy a home in need of repairs that you might not otherwise have been able to afford to buy. Plus, the down payment requirements are minimal, and often you get decent interest rates (note that the interest rates and discount points will vary by 203k lender, so it’s important to make sure that you’re getting a good deal on the loan).
The downsides are that not all properties qualify, there are limits on the funding you can get, and applying for the loan isn’t easy. For example, to apply for the loan you may need to hire an independent consultant to prepare the exhibits required (to get the loan, you have to provide a detailed proposal of the work you want to do and cost estimates for each item).
203k Loan Specialists in Bucks County and Montgomery County
Make sure you find a 203k specialist to help with this process. You want someone who's done these loans, and who knows the government requirements. In Montgomery County and Bucks County, Pennsylvania we recommend these local agents:
- Ed Rockhill with Movement Mortgage - He is also versed in Conventional HomeStyle Rehab Loans, similar to 203k.
- Douglas Schnell with HomeBridge Financial - Check out Doug's Q&A your home improvement financing process.
Ready to Start Your Home Remodel?
Tilghman Builders is a specialist in complete home renovations and remodels in Bucks & Montgomery County. Choosing Tilghman as your professional home remodel contractor ensures that no area will be overlooked. We will walk with you through the budgeting process, and also incorporate architectural planning in our Design-Build process. To find out more about how much a home remodel costs or how long a home remodel will take, visit our website and contact us today.