FHA 203k Rehabilitation Loans

The Federal Housing Administration (FHA), under Section 203k, will insure loans that include rehabilitation (rehab loans) and repair costs in the amount borrowed from an independent lending institution. The FHA does not lend money, but they insure loans based on their specific underwriting guidelines.

Section 203k of the FHA’s Rehab Loan Program is intended for neighborhood and community revitalization, as well as encouraging new home ownership. Real estate investors are able to obtain rehab loans that work the same way.

FHA 203k Rehab Loan Advantages

Another advantage to FHA's 203k rehab loan program is that buyers can focus on the location and floorplan instead of the condition of the home. Using a FHA 203k rehab loan, there is less competition for properties which allows for a more aggressive purchase price.

Using and acquiring homes with rehab loans are favorable to bank owned and HUD foreclosed properties because the property is sold “as-is.” More specifically, the foreclosure property can be sold in it’s current condition which is appealing to foreclosed seller.

FHA 203k Loan Qualifications

Standard FHA guidelines are used when applying for rehab loans. FHA’s credit underwriting guidelines are flexible and are advantageous for investor’s or first time home buyers looking to get a good deal on a property. Lenders are also qualifying buyers with 100% financing when used with down payment assistance.

On top of all this, FHA’s guidelines allow the seller to pay all closing costs (up to 6%). Banks are able to provide rehab loans with fixed rate or adjustable rate mortgages. In addition, buyers can receive credit aid from non-occupant co-borrowers.

Eligible Properties for FHA 203k Rehab Loans

• Single family residence (SFR)
• PUD's
• Condo's
• Owner Occupied Only (FHA 203k rehab loan)
• Purchase
• Refinance

FHA 203k Rehab Loan Process

After the seller accepts the buyers offer, the borrower chooses a licensed and bonded general contractor. The FHA approved consultant is then chosen by your lender (contact us for lender information). The rehab loan borrower, general contractor and consultant meet at the property to discuss the repairs needed on the home. The consultant then completes a work write-up of repairs to provide to the buyer, lender and FHA appraiser.

• Major structural repair (fire damage)
• Kitchen and bath remodel
• Room additions
• Landscaping
• Roofing
• Flooring
• Virtually anything except luxury items

FHA 203k Rehab Loan Appraisal Process

The FHA appraiser receives the rehab work-write up from the consultant. Then the appraiser completes the appraisal to determine “as completed” value. This is otherwise known as after repair value (ARV). FHA uses 110% of the “as completed” value to calculate the maximum mortgage amount of the rehab loan.

FHA 203K Rehab Loan Terms

Most commonly, construction needs to be completed within 6 months after the close of escrow. The buyer’s loan payments can be included in the rehab mortgage for up to 6 months (determined by the scope of work and timeline in the write-up). Next, the consultant determines the completion of work and authorizes the final draw (payment) to the contractor. After the final payment, the rehab borrower can now move into their newly renovated home.

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Streamlined FHA 203k Limited Repair Program

What makes the streamlined FHA 203k rehab loan program different than the conventional FHA 203k rehab loan?

Repairs are limited to $35,000 and the rehab work is limited to uncomplicated work which does not require a consultant or plans. Rehab work needs to be completed within 30 days of the close of escrow. The streamlined fha 203k limited repair rehab loan program only allows 2 draws, whereas the conventional FHA 203k rehab loan allows 5. The appraiser signs off on the final completion of work.

Appraisal Requirements

Most commonly, the rehab loan appraiser will receive a repair estimate from contractors and will be evaluated to determine the “as completed” value. The appraiser will also determine the work completion and the release of draws. Lenders will generally lend up to 110% of the “as completed” value for the rehab loan. There are no contingency reserves required for this rehab loan program.

• Roofs
• Gutters
• HVAC systems
• Plumbing
• Electrical
• Flooring
• Exterior decks, patios
• Windows
• Doors
• Septic or well

• Painting
• Insulation
• New appliances
• Lead paint stabilization
• Handicap accessibility
• Minor remodeling
• Kitchen
• Bath

Self Help Arrangements

“Self-help” arrangements allow the home buyer to do the repairs. However, the buyer must demonstrate an expertise in the field in which they want to perform work. The rehab money will only pay for supplies, not the labor. The supply receipts must be provided as well.