Do you have your eye on an older home that needs a little TLC, but you think the cost of repairs might put it out of your price range?
You might be the perfect candidate for a 203(k) rehabilitation loan.
9 questions and answers about 203(k) rehab loans
You’ve no doubt heard of a 401(k), but have you heard of a 203(k)?
Hint: One has to do with retirement savings and the other with buying a fixer-upper!
What is a 203(k) loan?
A 203(k) loan is a mortgage product available through the Federal Housing Administration (FHA) that lets you finance the cost of repair and rehabilitation of an older property right into your mortgage.
So instead of having multiple loans with money going to the mortgage and then other money going to various contractors, you have one bundled payment each month.
The portion of the money that’s earmarked for rehabilitation work on the home is put in escrow at the time of closing. It then gets paid out as repairs on the home are completed.
203(k) loans could work well for buyers who couldn’t otherwise afford to purchase a home that needs repairs.
Is there actually more than one kind of 203(k)?
Yes. The FHA 203(k) rehab loan actually comes in two flavors — one for big renovations that requires you to work with a 203(k) consultant, and a “limited” 203(k) offering smaller loans for repairs and renovations that aren’t as extensive.
You can borrow the same amount of money for repairs under both, but the requirement to work with a 203(k) consultant is waived in the case of the limited 203(k).
How much can I finance for repairs?
Rehab costs have to be a minimum of $5,000, but you can finance any amount up to $35,000.
What kind of properties qualify for a 203(k) loan?
The home you wish to rehab must be at least one year old and can be anything from a one- to four-family dwelling.
You can use a 203(k) loan to convert a one-family dwelling to a multi-family unit (four maximum) or convert a multi-family dwelling into a single home.
Certain mixed-use residential properties may qualify, as well.
What are the credit score and down-payment requirements?
As with other FHA loan products, you’ll need 3.5% down and you must have a minimum of a 500 credit score.
What kinds of repairs qualify?
According to the U.S. Department of Housing and Urban Development, the following types of improvement are permissible with 203(k) loan money:
- Structural alterations and reconstruction
- Modernization and improvements to the home’s function
- Elimination of health and safety hazards
- Changes that improve appearance and eliminate obsolescence
- Reconditioning or replacing plumbing; installing a well and/or septic system
- Adding or replacing roofing, gutters, and downspouts
- Adding or replacing floors and/or floor treatments
- Major landscape work and site improvements
- Enhancing accessibility for a disabled person
- Making energy conservation improvements
What is the ‘contingency reserve’?
Because rehab work can run into cost overruns, the FHA requires you to put up a contingency reserve to deal with those potential overages.
The contingency reserve is usually between 10% to 20% of the rehab costs, depending on the age of the home and other factors.
What’s the timeline on repairs when you do a 203(k) loan?
All rehab work must be completed within six months.
How do I apply for a 203(k) loan?
Click here to search for lenders who can originate 203(k) loans near you.
Be sure to click the 203(k) Rehab link at the bottom of the page to get the correct search results.