The Federal Housing Administration (FHA) 203k loans are immensely popular renovation loan products available to well-qualified borrowers looking to purchase either a fixer-upper or a home that just needs one or two additions to be “perfect”.
Under the program, construction costs and the traditional mortgage are combined into a single home loan to further limit closing costs and — perhaps most importantly — simplify the home renovation process. It’s available to both buyers and refinancing households in all fifty states, and like all FHA mortgages, require a downpayment of just 3.5% and make home ownership possible to those with less-than-perfect credit.
A specialized home construction loan, the 203k allows borrowers to finance the cost of remodeling and renovation projects and repayment on that loan is part of a monthly mortgage payment. As the borrower, you’ll benefit from one single loan payment and, because both loans were executed at the same time, save yourself from paying additional closing costs.
As a FHA-backed home loan, the 203k follows the standard eligibility requirements of a FHA mortgage:
Borrowers will be expected to document annual income via 1040s, W-2s, and 1099s as needed.
Debt-to-income (DTI) ratios must not exceed 0.45
Minimum FICO score of 640
Maximum borrowable amount is 110% of post-construction value
The FHA is fairly broad when defining the types of repairs and construction projects permitted with a 203(k) loan — all the way down to the foundation, but does outline repair types which fall into either the Standard or Streamlined version of the core product.
The most obvious qualifier for the Standard 203k is estimated cost. If the estimated cost of repairs exceeds $35,000, you’ll be opting for a Standard 203k. Structural repairs, including relocating load-bearing walls, are also prime candidates for a Standard 203k. Structural work will also likely require the services of an architect and FHA consultant to make sure adherence to code and best practices are observed.
For the majority of home improvements, though, you’ll want to look at the Streamlined 203k. Because it’s a simpler loan to manage, there’s considerably less paperwork, too.
What falls under the Streamlined 203k? For starters, minor remodeling, basement finishing, window and siding replacement, and HVAC repair/replacement. As a general rule of thumb, if the project doesn’t involve any structural repair or total cost is below $35,000, it’s a Streamlined candidate.
Contrary to the popularly held opinions of some real estate professionals, renovation loans like the 203k don’t take any longer to close than a traditional mortgage nor are they tangled up in red tape. They’re valuable loan products for the first-time homebuyer who just doesn’t want to tap into as-yet-unrealized equity to finance any repairs and renovations.
Our new eBook puts some of the myths and misconceptions surrounding renovation loans to rest and provides you with in-depth information about the 203k and other commonly available products. Download it today.
