If you've been passing up buying homes that require cosmetic repairs because you lack the funds to fix them up, the Federal Housing Administration (FHA) has a program that can benefit you. Not to be confused with FHA's much more complicated 203(k) program, a Limited 203(k) loan eliminates a lot of the paperwork involved and simplifies the process to obtain rehab funds. Homebuyers—especially first-timers—are often turned off by the thought of having to make substantial home improvements. For those willing to take on the work, a Limited 203(k) loan might be the best place to start.
How a Limited 203(k) Loans Works
Before Limited 203(k) loans, when someone bought a home, they applied for a mortgage and a separate home equity loan to fix it up, resulting in two loans. However, many lenders won't rehab loans, and some won't fund equity loans at closing, especially if there is no equity. A Limited 203(k) loan is figured into the original loan balance, resulting in one loan.
Homebuyers can take advantage of the Limited 203(k) program and finance up to $35,000 into their mortgage to make an upgrade, improvement, or repair. It can be an adjustable-rate or fixed-rate mortgage, and the balance can exceed the purchase price of the property. Luckily, borrowers are not required to hire professional consultants, licensed engineers, or architects. Your home inspector can put together a list of recommended repairs and improvements, and you can be cost-effective and decide what projects to do yourself.
Eligible Repairs and Improvements
The Limited 203(k) 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 and improvements from the U.S. Department of Housing and Urban Development (HUD):
- Roofs, gutters, and downspouts
- HVAC systems
- 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
The list is subject to frequent change, so double-check with your preferred lender.
Repairs Not Permitted
The following is a list of repairs that are not eligible:
- 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
Special Conditions and Terms
There are special conditions involved with the program to limit abuse. To begin, borrowers must occupy the property, and it cannot be vacant for more than 15 days. If the job requires a permit, borrowers must get a permit and a sign-off before beginning, but the work must commence within 30 days from closing and be completed within six months. All improvements to existing structures must comply with HUD's Minimum Property Standards (MPS) and meet local building codes.
Requirements to Perform the Work
Borrowers can select among licensed contractors to perform the work, but the lender may review the contractor's experience, background, and referrals. They will also want a copy of the contractor's estimate and the agreement between them and the borrower. Borrowers can also arrange to do some or all of the work under a self-help arrangement. Do-it-yourself projects may require providing the lender with documentation supporting the borrower's knowledge, experience, and ability to perform the necessary work.
Disbursement of Payments
There is a maximum of two payments to each contractor, including the borrower, providing the borrower works under a self-help plan, and no more than a 50% advance is allowed. Do-it-yourself allowances do not include labor, only materials costs. Final payment is paid after submission of evidence of payment to sub-contractors, suppliers, or other possible lien claimants.
Loans Below $15,000
If you apply for a loan less than $15,000, the lender is not required to inspect the completed work or authorize a third party to inspect the completed work. A letter from the borrower or copies of contractor receipts will suffice as a notice of completion, providing the lender has no reason to determine a third-party inspection is necessary.