FHA 203K Loans

What is a 203k loan?

A lot of people are familiar with the FHA loan program, but there are actually a few different specialty sub-programs within the overall framework of the FHA loan program.  Two of these make up the FHA 203k loan program, which is arguably one of the best products available to purchase a new home for your family.

This unique loan product is also known as renovation home loan or fixer-upper loans. The two different 203k loan programs both serve the same purpose.  These are mortgage programs that will allow you to BORROW MORE than the current purchase price or value of your home for the purpose of repairing or renovating the house. 

The differentiation between the two different 203k loan programs stems from the amount of repair work that you are going to need done on the property.  But, before we get into that, let’s look at how a 203k loan is different than a typical FHA loan. 

How Is 203(K) Loan Different From A Regular FHA Program

The important thing is that the terms and rules for the loan itself are actually not different than the FHA loan program.  The loan terms and interest rates are all going to be based on the same rate for a standard FHA loan.  There is typically a hit to the interest rate to go with the renovation loan, but with FHA, this hit is typically only 0.5%!

The differences are more in the procedure of how the loan works.  On a standard FHA loan, you will apply with the underwriter, and we will get a conditional approval.  Once we meet all of the conditions, we will get a clear to close and schedule the closing.  One of the conditions will be for an appraisal.  In order to get this condition cleared, you will order an appraisal from an FHA rostered appraiser and so long as the house appraises high enough and so long as the appraiser does not call out any needed repairs, we will have everything that we need.   With a 203k loan, this part of the process will be a little bit more complicated. 

Stages Involved In A 203K Loan

1. First, we will get the appraisal just like on the FHA loan.  However, once we receive the report, we will now know if there are any items on the house that must be repaired in order to meet FHA guidelines.
2. Once we know about them, we will then move on to the next step, which is that you will need to choose the housing contractor that you will be using for the repairs. 
3. Now, on the 203k loan, there are actually approval steps that your contractor will need to jump through as well.  This is due to the fact that after we close, the funds will be given directly to the contractor to start work, so there will be a minimum level of verification needed for the contractor themselves.  Most of this is done simply by having some forms completed by the contractor. One of these forms will be an itemized bid for the scope of work that you have decided on.
4. Once we receive that, we will then need to send this back to the appraiser.  Once the appraiser has the bid, they will then attempt to create a future estimated value of the home based on the repairs that you intend to do on the property.

Which 203K Program Will You Need

The amount needed to complete the project will determine which of the two FHA 203k loan programs that you will qualify for.  The 2 FHA 203K programs are called “Standard” and “Limited” (previously known as “Streamline”) let us take a look in more details as to which one will suffice your needs.

1. If the total amount of work and fees is less than $35,000, you will be able to obtain 203K Limited previously known as 203K Streamline financing. The process that we spelled out in the previous paragraph will apply to you.
2. If the repairs end up coming out to more than $35,000, then you will need to obtain a full 203k loan or 203k Standard.  The only addition to the above paragraph is that once you have obtained the bid from the contractor, there will be one additional step.  You will then have to hire an FHA rostered Home Inspector to complete a full 203k cost analysis.  It is common for them to add some repairs of their own to this list at this point of the process. 

Wrapping It Up!

These additional steps are really the only difference in the loan process before closing, but once you do close, the process is completely unique.

1. You will close and receive the keys to the home. 
2. The loan will be paid out, but only in the amount of the original purchase price.
3. From this point forward, the project will move forward in waves.  Most of the time, it only takes one wave, but depending on the scope of the work, there may be multiple runs before the work is completed.
4. The way that the process works is that FHA will issue checks for 50% of the work being done to cover materials.  These will go directly to your contractor.  
5. Once the work on the home is completed, FHA will send a new appraiser to the house to complete a final inspection of the home.  It is not uncommon for them to say that more work is necessary and to require the contractor to return to the property.  But, typically, this is a fast part of the process.

Once your final inspection is completed, the lending process is done and the house is yours, but now in the exact condition that you envisioned it in!  There really isn’t another loan program like this out there, especially at the competitive rates that it offers.  If you are ready to get out there and create your own dream home for yourself, go ahead and give us a call here at the Heights!