July 6, 2021
Do you know what an FHA 203(k) rehab mortgage loan is? This is the loan to ask for from a participating FHA lender if you want to buy a home to renovate instead of purchasing a “like new” home.
What You Can Do With An FHA Rehab Loan
Borrowers are allowed to apply for a new purchase loan or an FHA refinance loan under the 203(k) program, which the FHA loan handbook says may be used to buy and rehabilitate an existing one- to four-unit Structure, which will be used primarily for residential purposes.
It can also be used to rehabilitate / refinance outstanding indebtedness “on the Structure and the Real Property on which the Structure is located” or to purchase and rehabilitate “a Structure and purchase the Real Property on which the Structure is located”.
According to HUD 4000.1, “Structure” is defined as, “a building that has a roof and walls, and stands permanently in one place that contains single or multiple housing units that are used for human habitation”.
Two Different Versions
FHA 203(k) rehab loans come in two basic types. One is the “standard” FHA 203(k) rehab loan, but the other one is a smaller loan for less ambitious projects. The standard version offers more money, and a longer list of approved rehab projects.
According to the FHA loan rules for the Standard and Limited 203(k):
“The Standard 203(k) Mortgage may be used for remodeling and repairs. There is a minimum repair cost of $5,000 and the use of a 203(k) Consultant is required…The Limited 203(k) may only be used for minor remodeling and non-structural repairs.”
What about the Limited 203(k)? How does it match the standard version?
“The Limited 203(k) does not require the use of a 203(k) Consultant, but a Consultant may be used. The total rehabilitation cost must not exceed $35,000. There is no minimum rehabilitation cost.”
There is a list of improvements allowed under the FHA 203(k) rehab loan program, they include but may not be limited to:
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
Title update fees
Permits
A Feasibility Study, when necessary to determine if the rehabilitation is feasible.
What 203(k) Funds Cannot Pay For
At this point, many want to know about specific improvements NOT covered under this program; following may not be financed under the FHA 203(k) rehab loan as per HUD 4000.1.
“The 203(k) mortgage proceeds may not be used to finance costs associated with the purchase or repair of any luxury item, any improvement that does not become a permanent part of the subject Property, or improvements that solely benefit commercial functions within the Property, including:
-recreational or luxury improvements, such as:
swimming pools (existing swimming pools can be repaired)
an exterior hot tub, spa, whirlpool bath, or sauna
barbecue pits, outdoor fireplaces or hearths
bath houses
tennis courts
satellite dishes
tree surgery (except when eliminating an endangerment to existing improvements)
photo murals
gazebos; or
– additions or alterations to support commercial use or to equip or refurbish space for commercial use.”
Speak to a participating FHA lender about alternative financing for such projects, or how to identify approved rehab work for your home that would be permitted under the FHA 203(k) program.
Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we’ll get you there in 9 steps.
Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner’s Insurance
Step 9: What to Expect at Closing
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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