FHA 203k loans are designated for houses that are damaged or sorely in need of rehabilitation. The down payment requirement is low, and eligibility criteria are loose. Homeowners whose homes need improvement can also refinance with these loans. A vast range of repairs, including room additions, bathroom remodeling, roofing, flooring and air conditioning systems can be funded with these loans.
There are two types of FHA 203k loans, regular and streamlined. Regular 203k loans are for homes that need structural repairs, and streamlined loans are for those that need non-structural repairs.
The loan amount is based on the estimated value of the home after the proposed renovation. Therefore projects adding to the number of bedrooms and/or bathrooms will offer a better increase home value as opposed to to projects that just make the rooms bigger or nicer.
For loan approval, a pre-approved contractor must be the hired company to perform to work.
In order to qualify, homeowners must plan to live in the home they are repairing. The following types of residences qualify:
Tear-downs: As long as part of the foundation will remain, houses that need to be destroyed and rebuilt are eligible.
Existing construction that is at least a year old.
Single-family, two-family, three-family or four-family dwellings.
Condos: if they have been approved for FHA loans.
Mixed-use properties: If you are repairing only the home portion, a mixed residential/commercial property can qualify.
Homes needing to be moved to rest on a new foundation.
You’ll pay 1.75% up-front as well as 0.55% ongoing for FHA 203k loan insurance. This protects the lender in case you are unable to repay. The lender may also charge a ‘supplemental origination fee’ (the greater of 1.5% or $350).
There are also costs related to the improvement work. An FHA approved consultant is required to review your plans before approval, and they’ll inspect work as it’s completed.