Buying a piece of distressed real estate can be a great way to
snag a dream home at a steep discount. But these homes are often in
need of repair to bring them up to date. Since 1978, the Federal
Housing Administration's (FHA) 203(k) mortgage program has been
available for homebuyers who want to purchase and immediately
renovate a home.
FHA 203(k) loans are available for all owner-occupants,
regardless of whether they are
, move-up buyers or homeowners looking to
FHA 203(k) loans
are the best-kept secret in the mortgage industry," says Susan
Barber, senior vice president for new construction and renovation
programs for Wells Fargo Home Mortgage in Marlton, N.J. "Consumers
really should know about this opportunity for renovation financing
because the loans are not just for foreclosures. You can use them
on all types of properties, even just an older home that needs
updating, and they are available for both purchases and
Rick Sharga, executive vice president of Carrington Mortgage
Holdings in Santa Ana, Calif., says FHA 203(k) loans can help solve
some of the current problems in the housing market.
"There are tens of thousands of properties in disrepair out
there, a lot of which are not even on the market because they are
in such bad shape," says Sharga. "An FHA 203(k) could allow an
owner-occupant to buy a home and fix it up, which could slow down
the depreciation in the market. Right now, only investors are
buying these properties and they are buying with cash at the lowest
Sue Pullen, vice president and senior mortgage advisor for
Fairway Independent Mortgage in Tucson, Ariz., says FHA 203(k)
loans were less popular when
home equity loans
were readily available. But she adds that, they are a good option
for today's market.
FHA 203(k) options
FHA 203(k) loans are available as standard or streamlined
The streamlined FHA 203(k) is limited to a maximum of $35,000
worth of repairs, with no minimum repair requirement, Pullen says.
Repairs for both standard and streamline loans must start within 30
days of the closing and must be complete within six months.
"The streamline loan limits the types of repairs to
nonstructural renovations and nonluxury items, so you can't add a
pool or move walls," says Pullen. "This loan is great for replacing
the HVAC or the carpet, replacing the appliances or the
The standard FHA 203(k) allows for structural repairs, requires
at least $5,000 of renovations and also requires a HUD consultant
to supervise the renovations.
Both loan types must meet requirements for the FHA loan limit in
FHA 203(k) requirements
As with all FHA loans, borrowers must make a down payment of 3.5
percent and pay mortgage insurance premiums. Borrowers must qualify
for the full loan amount, including the purchase price and the
renovation costs, with standards similar to those set by other FHA
mortgage lenders. Such standards include a credit score of at least
620 and a debt-to-income ratio of 41 percent to 45 percent.
Pullen urges borrowers to work with a lender experienced with
FHA 203(k) loans, because the rules about the repair work and
appraisals must be followed.
"An FHA 203(k) loan requires the buyers to make an offer on a
home and then to get at least one bid, but sometimes two or three
bids, from a contractor for the repair costs," says Pullen. "The
number of bids required is up to the lender. So, for example, if
you put an offer on a home at $100,000 and the contractor bids for
the repairs that you want are $20,000, you'll need to qualify for
the loan and make a down payment based on a $120,000 loan."
Mortgage lenders experienced with FHA 203(k) loans can suggest
several contractors who are have worked with the loan program
before. Pullen says that most mortgage investors require the
contractors to be licensed professionals to ensure quality
Appraisal and fees
In addition, says Sharga, the lender will need an appraisal of
the current home value and the as-repaired value, which is based on
the estimated value of the home improvements. The mortgage amount
will be based on the as-repaired value.
The fees for an FHA 203(k) loan are slightly higher than for a
traditional FHA mortgage, says Pullen. Such fees include a
supplemental fee of $350 or 1.5 percent of the cost of repairs,
whichever is higher, which can be wrapped into the loan. Once
repair work is complete, requirements call for an additional
inspection and title policy update to make sure no liens have been
filed. Pullen estimates that the extra fees average from $500 to
Conventional renovation and financing loans
Conventional renovation and financing loans are available for
owner-occupants, buyers of second homes and investors, but these
loans typically require a down payment of 25 percent or more and a
higher credit score than what is required by most FHA lenders.
"Borrowers who think they want to use the FHA 203(k) loan
program should ask their Realtor and their lender if they are
familiar with it and to help them decide if it is a good option for
them," says Sharga.