Using a 203K Loan to Pay for Home Repairs

The 203K loan can be used for small repairs (with a minimum of $5000 of work) like a new roof or replacing the boiler, all the way up to practically rebuilding the home and anything in between. Maybe you love a home, the neighborhood, etc., but you hate the kitchen cabinets...the 203K may be for you.

Eligible borrows can receive a mortgage to purchase the home AND establish a Rehab Escrow Account to fund the agreed renovations. The Rehab Escrow Account is managed like a Construction Loan: money is released after work is completed, the property is inspected by the lender, and the title is updated. Like all FHA loans, the property must be owner occupied and loan approval requires full documentation of income, assets and credit worthiness. At the same time, underwriting guidelines have some flexibility built in.

Loans are processed in the same fashion as any other loan (in terms of income, asset and credit) with the exception of the appraisal. Appraisers work in conjunction with the home improvement contractor and a HUD Approved Pre-Planner to determine: “As-Is” Value, “After-Improved” Value, costs of construction, and the draw schedule of the renovation portion of the loan. This work typically adds about a week to the approval process, largely because it should be done BEFORE contracts are signed. HUD provides a calculator tool on their website to help you calculate the mortgage amount and cash requirements.

There is a Streamline(k) Limited Repair Program for projects that require less than $35,000 of repairs.

It is recommended that you work with an experienced loan officer when exploring the 203K Program, as there are many details that need to be considered (from selecting a qualified contractor to the inner workings of the draw schedule and preparing for different contingencies). While the program is more intricate, with the right education ahead of time, it is extremely manageable.

Nothnagle has two mortgage partners to assist you in finding out if the 203K program is right for you.