Purchase Options

fha 203(k) loans

When buying a house that needs repair or modernization, homebuyers usually must follow a complicated and costly process.  The FHA 203(k) Renovation Loan offers a unique solution to this important need for homebuyers by combining the costs of a home purchase (or refinance) with the costs of home renovations.  It is a single, long-term loan with one application, one approval process, one closing, and one mortgage payment.  The two types of FHA 203(k) Renovation Loans include the Standard 203(k) and the Limited 203(k). For the most part, these loans work the same way and have similar eligibility criteria. But there are some key differences as well: 

  • Limited 203(k) — Repair maximum of $35,000. The home must be habitable while undergoing renovations. No structural changes are allowed. Half of the payment is required when renovations begin, the remaining half when they are completed. 
  • Standard 203(k) — No repair price limit. The home can be uninhabitable during renovations. Structural changes allowed. Phased payment schedule.

 203(k) Loan Eligibility.  

Since FHA 203(k) Loans are backed by the FHA, they follow the same requirements as a regular FHA loan.   Anyone can apply for an FHA 203(k) Loan.  All applicants must meet all the 203(k) Loan requirements: 

    • Proof of Verifiable Income and Employment History.  Applicants must be able to prove sufficient income to support the proposed house payment and other qualifying debt (see DTI requirements below).  In most cases, a two-year history of employment is also required.  There are a few instances where the two-year employment requirement is not needed (such as an individual who just graduated from school, a retiree or someone whose income is derived from disability).
  • A Minimum Credit Score of 620.  As with a regular FHA Loan, an FHA 203(k) Home Renovation Loan has a minimum credit score requirement of 580. However, the higher your credit score, the lower your interest rate and thus your monthly payment.  There is a 2-year waiting period if you’ve experienced bankruptcy and up to 3 years after a foreclosure.
    • Down Payment Requirement.  Like the regular FHA loan, the FHA 203(k) loan requires a minimum investment of 3.5% from Borrowers.  An investment of 5% or more offers the benefit of a lower monthly mortgage insurance premium.  Additionally, financing your home with an FHA insured mortgage also gives you the freedom to fully fund your down payment with down payment gifts. 
    • Debt-to-Income Ratio (DTI) Requirement. A debt-to-income ratio of less than 43%.  Your DTI is calculated by totaling the minimum payments on all your recurring monthly debts (student loans, credit card and installment payments, as well as your new proposed house payment), divided by your monthly gross income – expressed as a percentage. For example, if your new house payment including renovations) is $1,800 per month, your car payment is $529 per month, and your minimum monthly credit card payment is $315, your total monthly debt is $2,644. If your gross income is $6,000 per month, then your DTI is roughly 44% (2,644 ÷ 6,000 = 44.06).
    • Mortgage Insurance (MIP) Requirement.  Like the regular FHA 203(b) loan, the FHA 203(k) Renovation loan requires Mortgage Insurance regardless as to how much money you put down.  The mortgage insurance premiums contribute to the insurance fund the government maintains, should a borrower default on their loan. As part of your closing costs, you can expect to pay an upfront mortgage insurance premium of 1.75% of your loan amount; as well as a recurring annual mortgage insurance premium of 0.45% to 0.85% of your loan amount (depending on your loan term), that will be added to your monthly payment.
  • Eligible Properties.  As with FHA Loans, 203(k) Loans are only permitted for 1 – 4-unit primary or secondary residences. This can include townhouses or condos. In addition to the typical FHA property requirements, an FHA 203(k) Loan requires that the home be at least one year old. FHA 203(k) Loans cannot be used to finance new construction homes. Additionally, the property must meet the FHA Loan limits for your area. 

Applying for an FHA 203(k) Loan

It’s easy. To get started, you will want to gather the following (that applies to you):

  1. Proof of income and employment (pay stubs, tax returns, W-2 statements, retirement statements Social Security statements, child support and alimony documentation etc.)
  2. Documentation of financial assets (bank statements, 401k statement, document of income from investments, etc.)
  3. Most recent two Residential history (Name and Contact information for current landlord, etc.)
  4. Identity information such as your unexpired Driver’s License and Social Security card.
  5. An Approved Contractor.

If you have questions and would like to speak to someone, give us a call at 832.946.8400.

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