Many of the homes that buyers see in this market, especially homes that are distressed, come on market in tough shape, with no one on tap to make repairs – except for the future buyers. In other cases, having financial help with making updates could mean the difference between a house you like and a house you love. The FHA 203 (k) Rehab Loan is a loan program that rolls the cost of home repairs into the amount of the home loan. This loan program helps the buyer free up cash to make these repairs, and also provides some assistance to the new buyer in managing the remodel/repair process.
Basics of the FHA 203 (k) Rehab Loan:
- The cost of the homes repairs are built into the total loan amount.
- The home must appraise for the post-improved value. Your agent will be asked to show sold comps that support this value.
- Buyers can qualify with as little as 3.5% down.
- The loan process needs at least 60 days to close.
- The loan closes PRIOR to any work being done, and all repairs must be made within 6 months of closing.
- Many types of properties are eligible, but at this time you do have to plan to live in the home. (Must be owner-occupied)
- At the time of posting, the minimum repair amount is $5,000 with a max loan amount of $567,500 in King County.
- This program can be used for home purchases as well as refinances.
- There are many other guidelines – please contact your lender to review.
What types of repairs can be included?
The program is quite flexible in the types of repairs that can be made. It is very clear that “luxury repairs” are NOT included (addition of a swimming pool or hot tub, photo murals, barbecue pits, outdoor fireplaces, for example). However, allowable repairs include:
- Remodeling or structural alterations and reconstruction
- Aesthetic Upgrades (kitchen, bath, hardwoods, painting)
- Internal systems (heat, hot water, plumbing, electrical, AC)
- New appliances
- Landscape work & site improvements
- Energy conservation improvements and handicapped accessibility
The loan process is obviously more complex than other types of loans. One thing to remember is that you will be assigned an FHA consultant. The FHA consultant will work with you to write up a list of desired repairs and improvements, assist you in working with a contractor (the contractor does need to be approved by the bank), reviewing estimates (only one is necessary), inspecting work, and paying out the money.
It would be beneficial to use a contractor well versed in these types of projects – they are familiar with the standard of service, the timelines, and the paperwork and money distribution side of things.
Is the FHA 203(k) right for me?
While not for everyone, this type of program would fit well with:
- Buyers who don’t have the cash on hand to make needed updates and repairs.
- Needs a support team in place to help with the project management of home improvements. Consider your lender, the FHA consultant, the contractor, and your real estate agent as a virtual team available for you throughout the process.
- Buyers who understand the risks and rewards of going through a home improvement process.
- Someone with a flexible living situation – if you can’t live in the home throughout the repair process.
A word of caution: Only choose lenders that have verifiable experience processing the FHA 203 (k) Rehab loans and can prove that they have the team in place to successfully close this type of transaction. Change lenders if you have to!
Thank you to Eric Aasness of Wells Fargo for the great overview of how these loans work. We always recommend speaking to a lender to discuss the details of what loan programs are right for your personal financial situation.