Using FHA Program Options and 203(k) Program for Financing Your Project

Using FHA Program Options and 203(k) Program for Financing Your Project

The U.S. Federal Housing Administration (FHA) was established in 1934 to improve housing conditions and ownership opportunities for Americans. Since that time, the FHA loan programs have been used to finance more homes.

During the 1940’s, the FHA played a major role in housing our military as well as returning veterans and their families. In 1965, the FHA was set up under the management of Housing and Urban Development (HUD) and went on to deliver programs leading to the construction of millions of apartments to meet the needs of the elderly, handicapped and lower income Americans.

Today, FHA insured loans increase in popularity as more and more Americans become aware of the benefits of this powerful U.S. government backed program.

The FHA does not actually provide mortgage funds, but instead provides lenders with insurance that protects them against losses in the event of homeowner mortgage default. This reduces the lenders’ risk, allowing them to offer loans to buyers with less than perfect credit and with lower down payments. Lenders must follow specific guidelines established by FHA to assure

The FHA is funded entirely by proceeds from mortgage insurance included in the mortgage payments. As a result, the FHA is the only government agency that is entirely self-funded – operating at no cost to the American taxpayers. Additionally, the home construction and community development driven by FHA programs stimulate the economy through job creation and. tax revenues.

Some of the FHA benefits:

Low cost — FHA-insured loans have competitive interest rates because the federal government insures the loans for lenders.

Smaller down payment — FHA-insured loans have a low 3.5% down payment and the money can come from a family member, employer or charitable organization as a gift.

Easier qualification — Because FHA insures your mortgage, lenders may be more willing to give you loan terms that make it easier for you to qualify.

Less than perfect credit — You don’t have to have perfect credit to get an FHA-insured mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it’s easier for you to qualify for an FHA-insured loan than a conventional loan.

More protection to keep your home — The FHA has been helping people since 1934. Should you encounter hard times after buying your home, the FHA has many options to keep you in your home and avoid foreclosure.

The FHA sets limits on the maximum amount of loan funds available to a borrower relative to housing costs in a given area. Even if your credit worthiness and income would allow you to afford a larger mortgage, your lender will not allow you to exceed the regional limits established for an FHA loan. Contact HUD to determine the current limits for your area.

FHA 203(k) Program

The FHA 203(k) renovation loan program provides funds for both the purchase and renovation of a home packaged into one mortgage loan. Once the purchase of the home is closed, renovation funds are held in escrow to pay for pre-determined renovation work done by approved renovation contractors.

HUD’s 203(k) program can help you overcome this obstacle by enabling you to borrow funds for the purchase or refinance of a property plus the cost of making the repairs and improvements in one mortgage. The FHA-insured 203(k) loan is provided through approved lenders nationwide and is available to owners who will occupy the home themselves.

Down payment, credit qualification, loan limits, and other requirements are the same as standard FHA loans. Additional guidelines are set forth specific to 203(k) loans to provide for renovation of the home.

Types of FHA 203k loans

The Standard 203k is intended for more complicated projects that involve structural changes, such as room additions, exterior grading and landscaping, or renovation that would prohibit you from occupying the residence. A Standard 203(k) is also used if your project requires engineering or architectural drawings and inspections.

The Streamlined 203(k) is designed for less extensive improvements and for projects that will not exceed a total of $35,000 in renovation and related expenses. This version does not require the use of a consultant, architect, and engineer or as many inspections as the Standard 203k. The Streamlined 203(k) generally becomes the simpler, less costly option.

The Streamlined 203(k) program is intended to facilitate uncomplicated rehabilitation and/or improvements to a home for which plans, consultants, engineers, and architects are not required. This program allows discretionary improvements and repairs shown below:

Repair/Replacement of roofs, gutters and downspouts
Repair/Replacement/upgrade of existing HVAC systems
Repair/Replacement/upgrade of plumbing and electrical systems
Repair/Replacement of flooring
Minor remodeling, such as kitchens, which does not involve structural repairs
Painting, both exterior and interior
Weatherization, including storm windows and doors, insulation, weather stripping, etc.
Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/
dryers, dishwashers and microwave ovens
Accessibility improvements for persons with disabilities
Lead-based paint stabilization or abatement of lead-based paint hazards
Repair/replace/add exterior decks, patios, porches
Basement finishing and remodeling, which does not involve structural repairs
Basement waterproofing
Window and door replacements and exterior wall re-siding
Septic system and/or well repair or replacement

The Standard 203(k) program can be used for the following projects:

Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;
New construction (including room additions);
Repair of structural damage;
Repairs requiring detailed drawings or architectural exhibits;
Landscaping or similar site amenity improvements;
Any repair or improvement requiring a work schedule longer than six (6) months; or
Rehabilitation activities that require more than two (2) payments per specialized contractor. Mortgagors may not use the Streamlined 203k program to finance any required repairs arising from the appraisal that do not appear on the list of Streamlined 203k eligible work Items or that would:

Necessitate a “consultant” to develop a “Specification of Repairs/Work Write-Up”;
Require plans or architectural exhibits;
Require a plan reviewer;
Require more than six months to complete;
Result in work not starting within 30 days after loan closing; or Cause the homeowner to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted. (FHA anticipates that, in a typical case, the homeowner would be able to occupy the property after mortgage loan closing).

This program is eligible for use on single family homes as well as 1 to 4 unit buildings; including the conversion of a building from a larger number of units down to 4 or less. Following specific guidelines, the 203(k) mortgage can also be used on a condominium unit for improvement of the interior only. Provisions also allow for financing mixed-use buildings, such as those with retail or commercial space combined with residential. In these cases, the 203(k) loan can only be used for the residential portion of the building.