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The FHA 203(k) Loan Program Explained

The FHA 203(k) loan has somewhat of a funny name. The (k) refers to a specific section with FHA’s lending guidelines. A FHA 203(b) refers to yet another and is the most common FHA program in today’s market. A standard FHA loan to buy and finance a primary residence is an FHA (b) loan but no one really refers to it that way, it’s just an FHA mortgage. But so too is the FHA 203(k) program and for those who are wanting to buy and rehabilitate a property with one loan instead of taking out two, it’s an excellent program. The problem can be finding a lender or loan officer experienced with this product. Using someone that hasn’t worked with this program can lead to a very bumpy ride, or worse.

The 203(k) process is relatively simple but does have a few more steps involved. The first step is to submit an application to your lender for a preapproval. The application will have a property address as well as an itemized list of repairs/upgrades that will be financed into the permanent mortgage. What types of repairs are eligible for this program? There are actually two types of 203(k) loans, a streamline and a standard.

A streamline 203(k) loan allows you to make minor repairs up to $35,000. Such repairs are most often used in baths and kitchens but can be in other areas. The repairs must be considered “non-structural” which means you can’t add a new room or an outdoor deck for example or items considered “luxury” but you can finance

  • Kitchen and bath remodels
  • Appliances
  • Flooring
  • Roof repair/replace
  • Paint, interior and exterior
  • Energy-efficient improvements
  • And more

With a standard 203(k) loan, you can finance those improvements plus

  • Any structural changes
  • Connection to water/sewer lines
  • Major Landscaping
  • Moving the property to another location
  • Accessibility for disabled persons
  • And more

Once your plans and specifications have been drawn up, you’ll need to get a quote regarding the cost of materials and labor from a licensed contractor. Your licensed contractor must be an approved 203(k) contractor. Once your loan package has been completed it is submitted to the lender for an approval. The lender approves the loan and the contractor begins the work.

The construction period can take up to six months to complete and the lender will send an inspector to make sure the work is being done on time and on schedule for larger projects. Smaller, streamline refinance loans even allow you to move in while the work is being done when it’s practical. For standard 203(k) programs, you can also roll in up to six months’ worth of house payments. Your 203(k) has now financed the acquisition as well as the improvements with just one loan.