203(k) Rehabilitation Loan Mortgage Insurance
A 203k loan provides you with the unique opportunity to purchase a home that needs repairs or refinance your current home mortgage to include the cost of needed repairs through a single mortgage plan. The FHA 203k loan is the U.S. Department of Housing and Urban Development’s (HUD’s) primary program for the repair and rehabilitation of qualifying homes. In order to be eligible for this mortgage insurance program, you, your home and your repair project must meet eligibility requirements. By learning more about these requirements, you may gain a better understanding as to whether you may be eligible to apply for this type of loan.
An FHA 203k is primarily beneficial to low- and moderate-income families and households as down payment requirements are generally lower than other forms of loans. Therefore, it is important to review how this program works and how you can apply. To learn more about 203k, review the information found within the sections below.
What is a 203K rehab loan?
An FHA rehab loan is provided through HUD-approved mortgage lenders throughout the country and insured by the Federal Housing Administration (FHA), a division of the HUD. The loan provides the necessary finances to make repairs or upgrades to a home that you would like to purchase. Alternatively, 203k loans can also be obtained in refinancing a mortgage that you have on a home that you already own in order to pay for the cost of repairs and upgrades to the home, unlike other FHA loans.
How does a 203K Mortgage work?
If approved for a 203k loan, a portion of your loan will be used to pay for the purchase of your home. If you are already a homeowner, a portion of the loan will be paid towards the repayment of any existing debt when refinancing a mortgage instead. The remaining amount will then be placed in an interest-bearing account that you may use towards repairs and upgrades for your home.
An FHA 203k loan will require you to use a minimum amount of the loan towards eligible repairs and improvements to the home. These improvements or repairs must first be put towards the elimination of any existing safety hazards, health hazards or building code violations. After, funds can be used for cosmetic repairs or upgrades. However, funds cannot be used towards the purchase of items that are luxury items, such as swimming pools or gazebos. Repairs and improvements must be completed within 6 months following the issuance of the loan.
Learn more about FHA-backed mortgage loans by downloading our free guide.
203K Loan Requirements & Eligible Homes
For a 203k renovation loan to be granted to you, your home must meet eligibility requirements. Firstly, it is important to know that cooperative units and investment types of properties are not eligible for this form of loan. In order to be eligible for 203k, your home must be one of the following property types:
- A one to four residential units that were built and completed at least one year ago. One of four units include detached homes and townhouses.
- A condominium within a one to four-unit building. However, restrictions will apply for this form of residency and be limited to interior improvements.
- Mixed-use residential properties that include a portion of the property towards commercial space.
- The conversion of a one-unit residence into a two, three or four-unit dwelling.
- The conversion of a multi-unit dwelling into a one to four-unit dwelling.
FHA 203k Rehab Loan Eligible Home Improvements & Repairs
If your home is FHA 203k loan eligible, it is important to review the types of repairs and home improvements that funds may be used towards. By learning more about these eligible home improvements and repairs, you will be better prepared to make an informed decision as to whether to apply for a loan.
The 203k loan covers a variety of home improvement and repairs, including, but not limited to:
- Remodeling bathrooms or kitchens, including the installation of new built-in appliances.
- The replacement of downspouts, gutters or roof.
- The addition of a family room, bathroom or bedroom.
- The replacement of carpeting, flooring or tiling.
- The completion of a basement or attic conversion.
- The building of a garage or carport.
- The renovation of property that is deteriorating such as repairs to termite damage, structural issues or a chimney.
- Eliminating a hazard that poses a threat to health or safety, such as the removal of lead-based paint.
- Rendering a home accessible to the disabled.
- The addition of a porch, deck or patio.
FHA 203K Loan Eligible Borrowers
To receive a 203k rehab loan, you must be considered an eligible borrower. Basic eligibility requirements will primarily focus on:
- Credit based qualifications as borrowers must meet standard credit checks in order to be approved for the loan.
- Standard down payment requirements, which can be as little as three percent.
- Your ability to pay up front and annual mortgage insurance premiums.
Find out more on FHA eligibility requirements for various loans in our comprehensive guide.
203k Loan Rates and You
FHA 203k loan rates may vary, depending on the type of loan that you wish to apply for. Loans can be set as a 15 or 30 year fixed-rate mortgage or, alternatively, you can opt for an Adjustable Rate Mortgage (ARM) with a variety of options for the length of the loan. The total amount of your mortgage and your FHA loan rate will not only be based upon the value and cost of your home, but on the projected value of the home once renovations are completed and the projected cost of the work that will be completed on the home.
How to Apply for a 203k Loan
Before you apply for an FHA 203k renovation loan, you will need to find the property that you wish to purchase as well as have a primary feasibility analysis conducted by your real estate professional. If you need repairs for a home that you already own, you will need to find an HUD-approved lender to get started.
After finding 203k lenders that service your area, your lender will assign a consultant to you. This consultant will perform an inspection on the home, identify the need of repairs or improvements, identify any existing health or safety hazards and provide you with a cost estimate. From here, your lender can discuss loan options with you, so long as you, your home and your improvement or repairs are eligible for the loan.
What Are FHA Loans?
The Federal Housing Authority (FHA) insures mortgages and approved lenders to offer mortgages to eligible borrowers. Although available to all home buyers, the requirements of the loan make it attractive for first-time buyers. FHA-approved mortgages typically allow buyers to provide a smaller down payment and apply with a lower credit score than standard home loans. FHA loans covers many needs, including energy efficiency repairs and mobile home financing. Find out about FHA loan benefits in our guide.
Who Is Eligible For An FHA Loan?
If you are interested in getting a home loan through an FHA-approved lender, you must meet program requirements. The most important factor is choosing a mortgage provider approved by the FHA. Employment history is another crucial eligibility factor, as lenders will require proof of employment for the previous two years. Lenders will review your potential expenses, lending histories and your current debts to determine if you can pay your mortgage. Find out more about FHA loan eligibility by downloading our guide today.