The 203K loan program is a government program administered by the Federal Housing Authority (FHA). This program has been in existence for decades – it became less popular during the 1990s and started gaining again in popularity starting in the mid-2000s.
This program is often used by individuals wanting to purchase an existing dwelling as their primary residence but the dwelling requires significant renovation and/or repair. The intent of the FHA 203K loan is to encourage potential home buyers to purchase an existing dwelling in an existing neighborhood rather than building a new home in a new neighborhood. With the renovation of an existing dwelling it is also a renovation to an existing neighborhood.
Many people shun the purchase of an existing dwelling that is commonly referred to as a “fixer-upper” because they do not want to apply and if approved pay on two loans – a home loan and a home improvement loan. That is the beauty of the FHA 203K loan. The 203K loan bundles the home loan and the home improvement loan into one loan. With the 203K loan both the potential home owner and the dwelling they want to purchase must meet specific qualifications in order to be approved.
A stipulation associated with this loan is the individual(s) applying for the loan must make this dwelling their primary residence. These loans are eligible for people looking to flip homes. There are some exceptions that permit government or non-profit organizations to apply to a FHA 203K loan.
There are also two different types of 203K loans – the Regular 203K loan and the Streamlined 203K loan. The differences between these loans are basically the amount of renovation and/or repair that is required to the existing dwelling and the cost of the renovation and/or repair required to the existing dwelling. Both of these types of loans have a detailed list of what types of renovations and/or purchases, which are permitted -neither one of these 203K loans permit the purchase of luxury item(s).
The minimum amount for either the Regular or Streamline 203K loan is $5,000. The maximum amount of the Streamline loan is $35,000. With the Regular 203K loan the maximum amount cannot exceed 110% the approved amount of cost of the dwelling after renovation and/or repairs. The most common type of 203K loan is the Streamline.
When a buyer is interested in applying for a 203K loan, they meet with an inspector and contractor to get an idea of the costs of the material to make the necessary renovation and/or repairs as well as the cost of the contractor. Some potential home buyer(s) have the time and ability to make some or all of the necessary renovation and/or repairs themselves.
Sometimes the existing dwelling is not in need of extensive repairs but rather simply needs to be renovated to become more energy efficient with the addition of new siding; roof; windows; doors; weather stripping;replacement of a newheating, air conditioning, and venting system; etc. which all also qualify for a 203K loan.
A contingency reserve fund is associated with both the Regular and the Streamline 203K loan and is administered at the discretion of a HUD Field Office. The HUD Field Office will often recommend contingency reserve funds if the dwelling is less than 30 years of age, the type(s) of renovation and/or repairs being done to the dwelling, etc.
This contingency reserve fund is for the purpose of a cost overruns associated with the renovation and/or repair of the dwelling. The amount of money in the contingency fund cannot be less than 10 percent of the loan and cannot be more than 20 percent of the loan. A minimum of 10 percent contingency funding is required for the Regular 203K loan; however, there is no contingency funding required for a Streamline 203K loan.Most likely if the total amount of the renovation and/or repair costs total less than $7,500 the lender will not require a contingency fund.
If the all or some of the funds set aside in the contingency account are not used, the money may be used to complete additional work or make additional improvements if the lender is in agreement. The funds can be used as a one-time payment to the principle of the mortgage to assist in reducing the monthly payment and the overall principle.