What is a 203k Rehab Loan?
A 203k loan is an FHA Loan that allows you to purchase a home that needs at least $5,000 in renovations or updating. This one loan includes funds for the purchase AND all rehab costs, inspections fees and even 6 month’s carrying costs.
If the home is not habitable when you purchase it, HUD does realize that most people cannot afford 2 mortgage payments or paying rent and a mortgage payment while you wait for the work to be completed. HUD allows you to include up to 6 month’s of your mortgage payments in your loan so you do NOT have to pay your mortgage out of pocket for the first six months.
How do I pay my Contractor?
Your mortgage will include money set aside by your lender for the renovations in what is essentially a ‘Repair Escrow’. As the work is completed your 203k Inspector will be called to schedule an inspection of the rehab work completed. The 203k inspector will determine how much of the work is completed and only the line items that are completed will be paid.
For example, if drywall is hung on the walls but not yet skimmed and sanded (which means it is not yet completed) you can expect the 203k Consultant to approve 1/3 of the total line item for Drywall.
You have the right to be present at the Draw Inspections and all parties must sign the Draw Inspection paperwork including the Borrower, Contractor and Inspector before the Inspector can submit the Draw request to the lender.
How Long Does it Take to Process a Draw?
The Owner or Contractor should give the 203k Inspector 1 or 2 days notice to schedule the inspection. Allow a day for paperwork to be sent to all parties for signature. The Lenders then process Draws in 3-7 business days. The Lender will be sending a 2-party check to the address of the property or the Borrowers current mailing address. Be sure to specify this to your loan officer during your loan application process.
The 2-party check is usually sent by 2nd day air which means that the total Draw processing time is usually 7-10 days. Remember to let your contractor know that 10% of EACH DRAW will be held back until the job is completed and the Final Inspection is processed. That 10% goes into a ‘Hold Back’ account to make sure all work is completed, no mechanic’s liens were filed and is paid to the Borrower after a title search is completed at the end of the job.
What does a 203k cost? What are the Fees?
HUD has some Fee Schedule Guidelines for the Feasibility Inspection, 203k Work Write-up and for Draw Inspections. A feasibility Study is usually $295 and may be applied to the cost of a full 203k Work Write-up which ranges in cost from $400 to $1,000 depending on how much rehab work is needed. Draw Inspections usually cost approximately $150 depending on where the property is located.
The feasibility Study is usually paid at the time of inspection by the 203k Consultant. The Work Write-up is usually paid 50% upon site visit and the balance paid upon completion of all paperwork but you should talk to your 203k Consultant if you need to make some other arrangements.
All Fees are “allowable closing costs” and are factored into your HUD minimum out of pocket expenses toward buying a home and may be credited back to you at time of settlement if you choose to add these fees to your loan amount.
Do I need a Licensed Contractor?
You do not “always need” a licensed contractor to do some home repairs, however, you will need a licensed contractor to provide a copy of their License from the state of PA and a copy of their Insurance along with a signed Construction Agreement must be submitted to your Lender before you can get final loan approval.
Your Lender has some discretion to approve or not approve your requested Contractor. Be sure to look for reputable Contractors as these are the people who will make your house a home you can live in.
You should request to be added to their liability and worker’s compensation policies as an “Additional Insured” so you can receive written notices of any changes to their policy. Otherwise they can cancel their policies and you would never really know.
Can I do the work myself?
You can try but it is NOT recommended. You will need to let your Lender know this early in the application process. They will want to know what your experience and skill level is in the various work you are asking them to finance for you. Assuming you can demonstrate you have the expertise needed, they will NOT pay you for your labor – only materials. However, they may require a larger Contingency Fund in the event you cannot finish.
Rehabbing property is not for everyone. Even certain carpenters or other tradesmen should consider hiring a contractor to make sure the work is completed in a timely manner and at a fair price.
What is a "Contingency Fund?"
The Lender and the 203k Inspector will want to see that there is 10-15% of the total expected cost of repairs added to your loan amount for “unforeseen” items. Depending on the overall condition and your ability to ‘see’ all that needs to be seen in order to do a proper cost estimate, you will need 10% or 15% or even 20% in some of the more difficult rehab projects.
If you are purchasing a Foreclosure, a SCOPE property or some other "distressed" real estate, there is a good chance that you will not have all utilities functioning at the time you are making your buying decision and estimating the cost of repairs. Some of these situations require a little more planning for unforeseen items. After all, among the worst things that can happen is that you run out of money and cannot finish the job! No one wants that to happen.
Is the Scope of Work (Specifications of Repairs) changeable?
Generally yes EXCEPT that you may agree to a Change Order. In fact any changes will require a written Change Order signed by the Owner, Contractor and 203k Inspector before being submitted to the Lender for final approval. This protects the Owner and the Lender.
The Lender wants to be sure that any changes you are requesting do not affect the overall value of the property.
How is the Appraised Value Determined?
Your Lender will request an appraisal of the property in the “as-is” current condition. The appraiser will need a copy of the 203k Specification of Repairs so they can determine the “as-completed” value. This can cause delays in processing your loan which is why you need to get your 203k Inspection completed as soon as possible. You cannot get final loan approval without it!
This is a great feature when purchasing distressed property because often these properties need more rehab work than might drive the cost above appraised value. HUD recognizes that in order to stimulate development of these properties, appraisal guidelines need to be more flexible. Therefore the maximum value for your loan can be as much as the purchase price plus repairs up to 110% of the appraised value.
While you might think that means you are overspending on a property, part of the thinking is that you will have less maintenance and have a highly improved property in comparison to many of your neighbors.
Are All Properties Eligible for a 203k?
Almost all properties are eligible for a 203k loan. You need to have at least $5,000 in repairs to health & safety items, structural or mechanical items. After that, you can go up to HUD maximum loan limits!
If you need less than $35,000 in repairs, you can use the FHA 203k Streamlined program (which does NOT require a 203k Inspector) but your Lender might require a 203k Feasibility Study or even a full 203k Work Write-up, depending on the nature of the repairs needed.
203K Program FAQs
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David Artigliere, with ARTI Home Inspections LLC, is a HUD-Approved 203K Consultant and proudly serves Philadelphia, Reading, Allentown, Lancaster and surrounding areas.
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203K Frequently Asked Questions