Asheville Homes and LAND!- The Keep In Touch Blog


FHA 203K -- The Complete Guide

A member of the ECO-All-Stars Group (about 750 AR Members) Jonathan offers an interesting perspective on "greening'  home loans --in an article he wrote called "go GREEN with FHA"  I am including it here on Green-o-Lina's BLOG for review, and with Jonathan's own caveat:

" The end result of any process can rarely be guaranteed, but when done correctly on a purchase loan with an experienced loan officer and knowledgeable REALTOR home buyers can successfully use a FHA 203K loan to create a custom designed home with substantial equity from day one. .... If done correctly FHA 203K loans are one of the absolute best and most useful loan products on the market.


How Do FHA 203K Loans Differ from Traditional FHA Loans?

Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before a long-term mortgage is made. In the current market many of the numerous foreclosures sit on the market in disrepair due to vandals, theft and neglect. To lenders of traditional loans those properties are considered poor collateral that they’d prefer not to lend on. However, for FHA 203K loans the loan is based on after repair value and includes an escrow account to complete the repairs needed to bring the house to a condition that lenders prefer. That means that the current condition of the property is not as important as the condition of the property once the renovation is complete. This provides an outlet to purchase dilapidated properties, many of which have spent extended periods on the market due to the lack of availability to traditional financing, and solves the problem that most lenders face when dealing with property in disrepair. What this means to the home buyer is generally a significant discount to “as-is” value and, quite often, a fantastic deal on a house.

How Can FHA 203K Loans Be Used?

FHA 203K renovation loans are used in three different ways:

1. To purchase an existing home (and the land attached to that home) to renovate it.
2. To payoff existing debt on a current residence and renovate it
3. To purchase an existing home with the intent to move it to a new piece of land in a more preferred location.

The eligible improvements allowed on FHA 203K loans are numerous and extensive. About the only thing HUD frowns on are luxury improvements that are not going to be a permanent piece of the property. That means your plans for a hot tub with a 42′ inch plasma TV and a built in beverage cooler are not going to fly past the underwriter most likely. Here are just a few of the common and not so common things FHA 203K borrowers use the versatile loan for:

1. New freestanding appliances
2. Bathroom remodels
3. Master bedroom remodel
4. Upgrading HVAC
5. Adding energy efficient improvements
6. Wells and septic repair and upgrades
7. New siding
8. Interior painting
9. Exterior painting
10. Attic build-outs
11. Waterproofing the basement
12. Creating a media room
13. Adding a 2nd floor
14. Total renovations
15. Finishing the basement
16. Bedroom additions
17. Neck deck / patios
18. New hardwood flooring
19. New doors and windows
20. Upgrading plumbing and electrical
21. Opening up the floorplan
22. New granite countertops
23. Vaulting the ceilings
24. Going GREEN! Read this website for tips HOW!
25. New fixtures for bathtubs, sinks and kitchens
26. Making a house handicap accessible
27. Getting a condo or house ready for a new college student
28. Solar panels
29. Low flow toilets and shower heads
30. Creating a new master bedroom area
31. Much, much more…

What is the FHA 203K Loan Process Like?

One of the biggest misconceptions about the FHA 203K loan process is that it is hard and time consuming. It is only hard if your loan officer is inexperienced with the process. As far as being time consuming, whenever you involve third parties like architects and contractors you increase the amount of time a loan takes to close. However, on most renovations their is no reason the process cannot be completed in 30-45 days from start to closing. To get a true understanding of the process you need to understand there are two different kinds of FHA 203K loans:

The easiest and quickest version is the FHA 203K Streamline. This loan is for repairs under $35,000 that do not involve any kind of structural renovations. For Streamline FHA 203K’s you will have two draws. Generally, the lender will release 50% upfront and 50% when the work is completed. On most of these the lender will require a final inspection to make sure the work is complete, but on some of the simpler renovations you can provide receipts showing materials have been purchased and that will be sufficient.

On the full FHA 203K, loans exceeding $35,000 or involving structural repairs, the process becomes slightly more complicated. Many times on these when you are doing more extensive repair you will need to involve an architect and get architectural drawings so the contractor bids and appraisal are accurate. You will also be required to have a HUD approved 203K consultant that will help determine repairs and administer draws. On the full FHA 203K loans the process often looks like this:

1. Contact lender for pre-approval
2. Locate property & make offer — offer should indicate loan is a FHA 203K & include basic FHA disclosures**
3. Offer accepted
4. Home inspection
5. FHA 203K consultancy
6. Architectural drawings
7. Contractor bids & contractor selection
8. Appraisal
9. Loan submission & underwriting
10. Underwriting conditions cleared
11. Loan closing
12. Repair begins
13. Final inspection / Title Closeout

***Notes on the offer — Realtors should try and include as much contingency period as possible so that the borrower and the loan officer can get the home inspection and get preliminary numbers on work required and after-repair value. This insures that the numbers will work and that home buyer earnest money is not at risk.

Obviously, the process can vary from loan to loan, but the basic process remains the same.

End Result

The end result of any process can rarely be guaranteed, but when done correctly on a purchase loan with an experienced loan officer and knowledgeable Realtor home buyers can successfully use a FHA 203K loan to create a custom designed home with substantial equity from day one. They can use this loan, especially in this market, to solidify their future and create personal wealth. On a refinance home buyers can successfully fix those little nagging problems around the house and make those upgrades they have talked about for years. They can do so all in a low fixed rate government backed mortgage. If done correctly FHA 203K loans are one of the absolute best and most useful loan products on the market.



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Hi janeAnne,  Thanks for re-blogging this. I had missed it.  I'm so excited because I just recently found a lender here that will do these loans.  :)

Posted by Stephanie Edwards-Musa, knitwit at thred UP ( almost 12 years ago

More great information.

Re blogging is really useful. I see the logic and purpose of it now.


Posted by John Narrin (ECO-Steward Realty) almost 12 years ago

JaneAnne - GREAT INFO!  I don't know what the reop's in your area look like, but many of the ones around here (Ventura County, CA) are absolute DUMPS!  They're absolutely inhabitable and in desperate need of some major rehabbing.  For those buyers who choose to buy them, the 203(k) is a great way to go.  However, having said that, I can't find anyone around here who's still doing them except for Flagstar and even then they must be originated thru their retail branch.  I would get a "broker fee", which sounds more like a thinly veiled "referral fee".

Posted by Donne Knudsen, CalState Realty Services (Los Angeles & Ventura Counties in CA) almost 12 years ago

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