Introduced in 1978 with a revision of the National Housing Act (NHA), FHA 203K loans are designed to help America restore and preserve its existing housing stock.
While they enjoyed a brief run of popularity in the 1990′s they haven’t been widely used for many years, until now. Enter the 2007 foreclosure driven market, the 203K loan was resurrected.
With distressed property sales dominating the market since 2007, it is surprising the 203K loan, and other purchase and renovate loans, are not more available and more popular. According to HUD, about 25,000 people took advantage of one of the most useful loans on the market.
Why do more people not use FHA 203K? Simple, most lenders lack the expertise to execute renovation loans or are unwillingly to pursue a loan that requires more effort, experience and expertise than traditional mortgage loans.
How Do FHA 203K Loans Differ from Traditional FHA Loans?
Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security.
When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before a long-term mortgage is made. In the current market many of the numerous foreclosures sit on the market in disrepair due to vandals, theft and neglect.
To lenders of traditional loans those properties are considered poor collateral that they’d prefer not to lend on. However, for FHA 203K loans the loan is based on after repair value and includes an escrow account to complete the repairs needed to bring the house to a condition that lenders prefer.
That means that the current condition of the property is not as important as the condition of the property once the renovation is complete.
This provides an outlet to purchase dilapidated properties, many of which have spent extended periods on the market due to the lack of availability to traditional financing, and solves the problem that most lenders face when dealing with property in disrepair. What this means to the home buyer is generally a significant discount to “as-is” value and, quite often, a fantastic deal on a house.
How Can FHA 203K Loans Be Used?
FHA 203K renovation loans are used in three different ways:
- To purchase an existing home (and the land attached to that home) to renovate it.
- To payoff existing debt on a current residence and renovate it
- To purchase an existing home with the intent to move it to a new piece of land in a more preferred location.
The eligible improvements allowed on FHA 203K loans are numerous and extensive. About the only thing HUD frowns on are luxury improvements that are not going to be a permanent piece of the property.
That means your plans for a hot tub with a 42′ inch plasma TV and a built in beverage cooler are not going to fly past the underwriter most likely. Here are just a few of the common and not so common things FHA 203K borrowers use the versatile loan for:
- New freestanding appliances
- Bathroom remodels
- Master bedroom remodel
- Upgrading HVAC
- Adding energy efficient improvements
- Wells and septic repair and upgrades
- New siding
- Interior painting
- Exterior painting
- Attic build-outs
- Waterproofing the basement
- Creating a media room
- Adding a 2nd floor
- Total renovations
- Finishing the basement
- Bedroom additions
- Neck deck / patios
- New hardwood flooring
- New doors and windows
- Upgrading plumbing and electrical
- Opening up the floorplan
- New granite countertops
- Vaulting the ceilings
- Going GREEN!
- New fixtures for bathtubs, sinks and kitchens
- Making a house handicap accessible
- Getting a condo or house ready for a new college student
- Solar panels
- Low flow toilets and shower heads
- Creating a new master bedroom area
- Much, much more…
What is the FHA 203K Loan Process Like?
One of the biggest misconceptions about the FHA 203K loan process is that it is hard and time consuming. It is only hard if your loan officer is inexperienced with the process.
As far as being time consuming, whenever you involve third parties like architects and contractors you increase the amount of time a loan takes to close. However, on most renovations their is no reason the process cannot be completed in 30-45 days from start to closing.
To get a true understanding of the process you need to understand there are two different kinds of 203K loans:
The easiest and quickest version is the 203K Streamline. This loan is for repairs under $35,000 that do not involve any kind of structural renovations. FHA Streamline 203K you will have two draws. Generally, the lender will release 50% upfront and 50% when the work is completed.
On most of these the lender will require a final inspection to make sure the work is complete, but on some of the simpler renovations you can provide receipts showing materials have been purchased and that will be sufficient.
On the full FHA 203K, loans exceeding $35,000 or involving structural repairs, the process becomes slightly more complicated. Many times on these when you are doing more extensive repair you will need to involve an architect and get architectural drawings so the contractor bids and appraisal are accurate.
You will also be required to have a HUD approved 203K consultant that will help determine repairs and administer draws. On the full FHA 203K loans the process often looks like this:
- Contact lender for pre-approval
- Locate property & make offer — offer should indicate loan is a FHA 203K & include basic FHA disclosures**
- Offer accepted
- Home inspection
- FHA 203K consultancy
- Architectural drawings
- Contractor bids & contractor selection
- Loan submission & underwriting
- Underwriting conditions cleared
- Loan closing
- Repair begins
- Final inspection / Title Closeout
***Notes on the offer — Realtors should try and include as much contingency period as possible so that the borrower and the loan officer can get the home inspection and get preliminary numbers on work required and after-repair value. This insures that the numbers will work and that home buyer earnest money is not at risk.
Obviously, the process can vary from loan to loan, but the basic process remains the same.
203K Process – End Result
The end result of any process can rarely be guaranteed, but when done correctly on a purchase loan with an experienced loan officer and knowledgeable Realtor home buyers can successfully use a FHA 203K loan to create a custom designed home with substantial equity from day one.
They can use this loan, especially in this market, to solidify their future and create personal wealth. On a refinance home buyers can successfully fix those little nagging problems around the house and make those upgrades they have talked about for years.
They can do so all in a low fixed rate government backed mortgage. If done correctly FHA 203K loans are one of the absolute best and most useful loan products on the market.