How to Get an FHA Limited 203K Loan for Home Repair
If you've been passing up buying homes that require cosmetic repairs for lack of funds to fix them up, FHA has a program for you. Not to be confused with FHA's much more complicated 203K program, a Limited 203K loan eliminates much of the paperwork and simplifies the process to obtain rehab funds.
Dan Tharp, a mortgage loan officer at Guild Mortgage in Sacramento, believes first-time homebuyers should get all the help they can. He says first-time buyers are often turned off by fixers or overwhelmed and ill-prepared to deal with the work required to bring some homes up to today's standards. "Buyers get their foot in the door," Tharp explains, "and say 'We have a lot of work to do here, and we're never going to get it done.'"
A Limited 203K loan might be the answer.
How Does a Limited 203K Loan Work?
It used to be that you bought a home and then applied for a home equity loan to fix it up, resulting in two loans. But many lenders won't make rehab loans. Some won't fund equity loans at closing, especially if there is no equity.
- A Limited 203K loan is figured into the original loan balance, resulting in one loan.
- It can be an adjustable-rate or fixed-rate mortgage.
- The mortgage balance can exceed the purchase price of the property.
- Borrowers are not required to hire professional consultants, licensed engineers, or architects.
- Your home inspector can put together a list of recommended repairs/improvements. This is a cost-effective and fast way to do it.
Eligible Repairs and Improvements
The Limited 203K loan allows for simple repairs that can be easily estimated and completed. Many are considered light cosmetic repairs, but some will require hiring a licensed contractor if it falls out of the borrower's area of expertise. Here is an approved list of repairs/improvements from HUD, which can change at any time. Double check this list with your preferred lender.
- Roofs, gutters, and downspouts
- HVAC systems (heating, venting, and air conditioning)
- Plumbing and electrical
- Minor kitchen and bath remodeling
- Flooring: carpet, tile, wood, etc.
- Interior and exterior painting
- New windows and doors
- Weather-stripping and insulation
- Improvements for persons with disabilities
- Energy efficient improvements
- Stabilizing or removing lead-based paint
- Decks, patios, porches
- Basement completion and waterproofing
- Septic or well systems
- Purchase of new kitchen appliances or washer/dryer
- Repair or remove an in-ground swimming pool
Special Conditions and Terms
- No minimum loan balance required.
- Borrowers must occupy the property.
- Property cannot be vacant for more than 15 days.
- Work must be completed within six months.
- Work must be professional.
- If the job requires a permit, borrowers must get a permit and a sign-off.
- Work must commence within 30 days from closing.
- All improvements to existing structures must comply with HUD’s Minimum Property Requirements (MPR) and meet local building codes.
Repairs Not Permitted
- Landscaping or yard work
- Major remodeling
- Moving a load-bearing wall
- Room additions or add-ons to the home
- Fixing structural damage
- New swimming pools
- An exterior hot tub, spa, whirlpool bath, or sauna
- Barbecue pits, outdoor fireplaces or hearths
- Tennis courts
- Satellite dishes
- Tree surgery (except when eliminating an endangerment to existing improvements)
- Photo murals
Requirements to Perform the Work
- Borrowers can select among licensed contractors.
- The lender will review the contractor's experience, background, and referrals.
- The lender will want a copy of the contractor's estimate and the agreement between the contractor and borrower.
- Borrowers can also arrange to do some or all of the work under a "self-help" arrangement.
- Do-it-yourself projects require providing the lender with documentation supporting the borrower's knowledge, experience, and ability to perform the necessary work.
Disbursement of Payments
- Maximum of two payments to each contractor, including the borrower, providing the borrower works under a "self-help" plan.
- No more than a 50% advance is allowed.
- Do-it-yourself allowances do not include labor; only materials costs are allowed.
- Final payment is paid after submission of evidence of payment to sub-contractors/suppliers or other possible lien claimants.
Reasons to Apply for a Loan Below $15,000
- The lender is not required to inspect the completed work.
- The lender is not required to authorize a third party to inspect the completed work.
- A letter from the borrower or copies of contractor receipts will suffice as notice of completion, providing the lender has no reason to determine a third-party inspection is necessary.
DISCLOSURE: Guild Mortgage is the author's preferred vendor.
At the time of writing, Elizabeth Weintraub, CalBRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.