What are 203k loan requirements?

A Federal Housing Administration (FHA) 203k Loan program (also known as a rehab loan) is offered by the federal government for individuals who wish to buy a home that is in need of repair. Rather than obtaining a standard mortgage loan and an additional loan for the repairs, likely at a much higher rate of interest, the FHA 203k packages these together. As such, there are certain criteria for the program.

There are two types of 203k Loan programs: Standard and Streamlined.

Common requirements:

• It can be used from single-family to four-family houses, condos (if approved by the lender), mixed residential/commercial if repairing on the residential portion and tear does where the foundation will remain.
• It can only be used by the owner/occupant and nonprofit groups. It cannot be used by investors.
• The repairs/improvements must be completed within six (6) months.
• It does not include ‘luxury items.’ That means you should check with your FHA approved lender if you are unsure.
• Home must meet basic energy efficient and structural standards.

Standard 203k:

• The cost of repairs/improvements must exceed $5,000.
• The maximum amount of the loan is 110% of the value of the home after completion as determined by an appraiser.
• The standard 203k is intended for major repairs/improvements such as new plumbing/wiring, new additions, major landscape work or large scale energy efficiency improvements, as well as fixing safety issues such as lead paint or asbestos removal.
• A certified 203k consultant is required to complete a home inspection.

Streamlined 203k:

• There is no minimum repair cost; however the maximum is $35,000.
• When the repairs exceed $15,000, an inspection must be completed to determine that all repairs were completed.
• It is intended for cosmetic repairs or improvements that do not require plans, consultants, engineers or architects.

You can find more information at the Department of Housing and Urban Development website: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kmenu

The 203(k) loan is the U.S. Department of Housing and Urban Development’s (HUD) answer to a problem that often faces prospective homeowners who fall in love with a home that needs some fixing up. With conventional loans, banks often require that repairs be complete before making the loan to purchase the home.

This requires the prospective owner to look for construction loans from lenders that don’t want to make a loan for repairs and renovations on a property that the borrower doesn’t own. If they qualify for the construction loan, the interest rate is often higher and the timeframe to pay back the loan, short.

The 203(k) loan is HUD’s answer to that problem. It combines the loan for the purchase or refinance of the property with a construction loan for repairs and renovations of the same property.

Just like an FHA loan, there are requirements and limitations. Among the most notable:

1) Once renovations are complete, you have to occupy the home. No investment properties allowed.

2) Single family homes as well as property with up to four units are allowable. You may also convert a single structure down to four units or less. Condominiums are allowable for improvement of the interior only.

3) Properties that function as both residential and commercial property are eligible providing that no more than 25 percent of the space of a one story building is used for commercial (storefront) purposes. Two and three story buildings have different percentage requirements. Find those on the HUD website at the address below.

4) No luxury renovations are permitted. For example, adding a pool would probably not be allowable. Most other renovations, including the addition of extra space, are permitted.

5) All work must be completed in a manner that addresses energy efficiency and building codes.

6) Work has to be completed by licensed contractors. Homebuyers may only perform the work if they can demonstrate professional expertise. They may not, however, charge labor for the work.

7) Cost estimates can come in any format but must be itemized and include a description of the work.

If you meet the requirements for an FHA loan, you likely qualify for a 203(k) loan.