The FHA 203(k) Primer

Now a days, homes that are deemed as ‘Fixer Uppers’ are almost as popular as those that are move in ready.  The FHA 203K loan is a way to simultaneously finance the acquisition of a property and the funds to remodel/ renovate the home.

You can finance a 1-4 family, residential, mixed use or condominium (approved by the FHA), which you plan to occupy as your primary residence only.

Once you find a potential property, you will need to select a licensed contractor and make a complete list of the items needing repair or replacement and the associated costs. You will need to break out the cost of labor and material in the scope of work. It is important to note that the must be on the lender’s approved list. If the contractor isn’t approved, they will need to complete a brief application and be thoroughly vetted.

Approved projects can include:

• Adding a patio or deck
• Complete bath and kitchen remodels
• Flooring, plumbing , electrical, roofing and siding
• HVAC systems, adding a bedroom or even a second story
• Structural repairs
• Installing new doors, windows
• Replace new and septic systems

Once your contractor has completed the scope of work, it must be sent back to the lender. 

The staff will review the items and if the job exceeds $35,000 in cost, a cost consultant is ordered to validate the contractors estimate.

After the contractor’s scope of work and the cost consultant’s number are reconciled, we will order an appraisal. The appraiser will assess the property as improved.

Example: If you acquire the property in its current condition for $200,000 and the improvements will cost another $30,000, the appraiser will view the property as if the $30,000 worth of improvements have been finished. This is sometimes referred to as “future value” or “as repaired” value.

How much you can borrow depends upon your debt to income ratios but your final loan amount can be no greater than the FHA loan limits for the county where the property is located.  Your down payment requirement will be 3.5% of the final value. The minimum amount of improvements must be at least $5,000.