An FHA 203(k) mortgage is basically a rehab loan, which can be used as a new purchase loan or a refinance loan for the purpose of repairing/rehabbing an eligible property.
The FHA single family home loan handbook, HUD 4000.1, has a list of requirements and guidelines for FHA 203(k) loans, which includes a set of allowable improvements as well as a list of things FHA loan money cannot be used for. Let’s examine what is permitted with an FHA 203(k) loan first.
Borrowers who are approved for an FHA rehab loan may use the loan for any of the following projects acceptable to the lender:
– costs of construction, repairs and rehabilitation;
– architectural/engineering professional fees;
– the 203(k) Consultant fee subject to the limits in the 203(k) Consultant Fee Schedule section;
– inspection fees performed during the construction period, provided the fees are reasonable and customary for the area;
– title update fees;
– permits; and
– a Feasibility Study, when necessary to determine if the rehabilitation is feasible.
That list is printed verbatim from the FHA loan handbook, which says that any of the above costs may be included in the loan amount. There are some restrictions. Borrowers who choose an FHA Energy Efficient Mortgage option with their 203(k) rehab loan should know that according to HUD 4000.1, “Any costs for Energy Efficient Mortgages and Solar Energy Systems must not be included in financeable repair and improvement costs.”
For Borrowers performing their own construction/rehab work, “the Mortgagee must include the costs for labor and materials for each Work Item to be completed by the Borrower under a Rehabilitation (Self-Help) Loan Agreement.”
There is also the possibility that a contingency reserve fund may be required. According to HUD 4000.1, “Contingency Reserve refers to funds that are set aside to cover unforeseen project costs” and while such a reserve may not be required in every case, you should definitely speak with a loan officer to determine whether your project will be required to have one.
The age and condition of the property may play an important part in establishing whether a contingency reserve is needed. Speak to your loan officer about this early in the process as state law, lender standards, or other requirements above FHA loan rules may affect how your transaction may proceed.
We’ll discuss more about FHA 203(k) rehab loans in our next blog post, including what types of projects are not allowed under the program.