August 16th, 2012
FHA 203(k) loan amounts are based on an appraisal of the home as-is, plus an estimate of the as-repaired value. The total amount that can be borrowed for both renovations and purchase costs cannot exceed the maximum FHA loan limits for the area.
Regardless of whether the FHA loan is for a purchase or refinance, borrowers have two options for an FHA 203(k) loan:
- Streamlined 203(k). Streamlined loans are limited to a maximum of $35,000 in repairs, which must be non-structural, non-luxury projects such as replacing the HVAC system, replacing windows, appliances or kitchen counters. There is no minimum repair amount. All repairs must start within 30 days of settlement and be complete within six months.
- Standard 203(k). This FHA loan has a minimum repair amount of $5,000, allows structural repair work and requires a HUD consultant to supervise and approve of all renovations.
FHA mortgage requirements
Qualifying for an FHA 203(k) loan is similar to meeting traditional FHA mortgage requirements, including the need for a down payment (or home equity) of at least 3.5 percent, and the payment of mortgage insurance premiums. FHA lenders have varying standards for qualifications, but most require a credit score of at least 620 or 640 and a debt-to-income ratio of 41 percent to 45 percent, based on the total loan amount for renovations and purchase as well as other debts.
In addition, borrowers must pay slightly higher interest rates and additional fees that typically total about 1.5 percent of the cost of repairs. But given the limited availability of renovation loans and the higher credit and down-payment requirements for these transactions, an FHA 203(k) loan may be worth the extra costs for many homeowners and buyers who would like to renovate.
Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.