Introduction to the FHA 203K Renovation Loan

Part 1- FHA 203K Renovation Loan

There is a little known secret in the lending world called the FHA 203K renovation loan.   If you qualify for an FHA loan, then you’ll qualify for the FHA 203K loan.  This loan allows renovation costs to be tacked onto the sales price of the home and be included in your total loan amount.  The home buyer has ONE loan, to one lender, so keeping track of monthly payments is easy.

There are 2 types of FHA 203K renovation loans. One is the streamlined version, and the other is the full version.  The full version is NOT offered by too many lenders in the Denver area, and you’ll want to make sure you are working with a lender that is well-versed in this type of loan.  If you need a recommendation, I’d be happy to point you in the right direction, or just fill out this pre-approval form.

The streamlined FHA 203K renovation loan is designed for renovations that will cost less than $35,000.  The full FHA 203K renovation loan is for projects that will cost in excess of $35,000 and/or have a structural renovation component to the work order.  The full version requires the oversight of an FHA consultant, which your lender will assign, and is a much more in-depth renovation.   The total loan can go up to the FHA loan limit (or as high as you qualify for based on your income, debt, and assets), which is $406,250 for most counties in Denver metro.  You can even use this type of loan to completely scrape a house and start over!

When to Consider the FHA 203K Renovation Loan

The FHA 203K renovation loan can be the perfect option when a buyer finds THE home with the perfect layout and location, but the condition of the property is less than desirable.  Or, it can be used for something as simple as buying new appliances for the home.   The FHA 203K renovation loan can also be used to finance a home that otherwise is not eligible for FHA financing due to the poor condition of the home!!   The FHA 203K loan is for owner occupants only.

What type of renovations are included in an FHA 203K Renovation Loan?

The sky is really the limit on what is allowed to be financed.  You can build a deck or patio (as long as it is directly adjacent to the home), complete interior remodels, make some energy efficient upgrades, add a garage, paint, etc.   It will not cover any fencing, hot tubs, gazebos, fire pits, sheds, or other landscaping, except for negative drainage repair.

To calculate the total loan amount for an FHA 203K Renovation Loan, you would use the following equation:

Purchase Price + Renovation Cost + Contingency Reserve* + Fees = Total Acquisition Cost

* The contingency reserve is determined by your lender, but is typically about 10-20% of the construction cost.  This is essentially a built-in buffer to ensure that actual costs don’t extend beyond your loan amount.

As with any other FHA loan, the buyer will need to bring a minimum of 3.5% of the total acquisition cost to closing as the down payment.   There are some down payment assistance programs and this 3.5% can also be gifted to the buyer as long as it is properly documented.

I have outlined the nuts and bolts of the FHA 203K renovation loan program in this article.  Eager to learn more?  Check out Part 2 of my Denver FHA 203K renovation Loan blog post!   What a great way to be able to buy that fixer upper house, and roll the renovation costs into your loan!

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Comments (1)

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  1. Thomas Young says:

    From my experience with 203k loans, the best advice is to use a lender that offers assistance via third party with 203k processing.
    This shortens the closing time by weeks. Try for more information.

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