The FHA 203K loan program is the primary program for the rehabilitation and repair of single family properties.
The loan program offers the borrower one mortgage loan, to finance both the acquisition and the rehabilitation of the property.
To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work.
This program can be used to accomplish rehabilitation and/or improvement of an existing one-to-four unit dwelling in one of three ways:
How a FHA 203k loan works
A portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed.
The cost of the rehabilitation must be at least $5,000 and a maximum of $35,000.
The value of the property is determined by either:
(1) the value of the property before rehabilitation plus the cost of rehabilitation, or
(2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.
FHA 203k loan requirements
You've found the perfect home but it needs some work. A 203K loan is your answer. It's one loan both for the purchase and rehab.
Let's say you want to purchase a property for $100,000 and the property needs $35,000 for rehab. The total of $135,000 will require a 3.50% down payment or $4,725.
The offer is the purchase price of the home only. Do not include the cost of repairs anywhere in the sales contract or offer. In the above example, the purchase price on the sales contract or offer would be $100,000.
At closing, the seller of the property is paid off and the $35,000 are put in an escrow account to pay for the repairs and improvements during the rehabilitation period.
FHA 203k loan refinance
You must own the property for at least six months before you can qualify for refinancing.
You are required to use at least one contractor to do the repair work.
Self-help renovations are not allowed unless the borrower can prove they have proper expertise.
When choosing a contractor, FHA guidelines state you must get an estimate which is broken down into specifics regarding the costs of each project. Contractors must sign an agreement to do all the work included in the estimate for the amount and within the time specified.
What improvements are allowed by the FHA
FHA 203k loan requirements
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FHA announced a policy change to address risk and strengthen finances. FHA changed the minimum credit scores for new borrowers:
A collection is minor in nature usually does not need to be paid off as a condition for loan approval
Chapter 7 Bankruptcy at least two years must have elapsed since the discharge date
Foreclosure must have been resolved for at least 3 years
FHA guidelines requires three year past from the date of sale of the property
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