203K Loan Requirements

An FHA 203k loan can be an excellent option for anyone looking to purchase and rehabilitate an older house, or for those looking to refinance and/or remodel their existing home. Before embarking on the application process for one of these loans, however, it is important to know the ins and outs of 203k loan requirements. An awareness of the qualifications for loan eligibility can better prepare potential borrowers to meet with lenders and contractors.

203K Loan Requirements : The Basics

In a nutshell, a 203k loan is a federally backed construction loan that is overseen by the Federal Housing Association, part of the U.S Department of Housing and Development. The loans aim to improve appearance and livability of single- family homes, or extended family homes of up to four units. Because the kind of run-down “fixer-upper” homes that can benefit from this loan are often located in lower-income areas, the 203k loan requirements and stipulations are a bit more lenient than they would be with a private lender.

Credit History

As is the case in any loan application, one of the first things a lender will look into is an applicant’s credit history. However, this is one of the areas where 203k loan requirements are a bit more flexible than they are in other loans. For example, FHA-approved lenders will approve applicants with lower credit scores: generally, they require a minimum of 640. Those with a history of bankruptcy can also be approved for these loans, so long as at least two years have passed, and credit ratings have since increased.

Income

Income levels comprise another of the 203k loan requirements. Applicants will be required to submit detailed information about their employment, so that income can be verified. Full-time employment is obviously preferred, but again, the 203k loan requirements demonstrate more flexibility by accepting part-time, rental, and miscellaneous incomes as well. Potential borrowers, however, must be able to demonstrate that they have received a steady income for at least 12 consecutive months prior, and that they will continue to receive as much for the ensuing three years.

203K Loan Requirements: Eligible Property

The 203k loan requirements also extend to the property under consideration. To be eligible for an FHA rehabilitation loan, properties must be between a one and four family dwelling. In other words, single family homes, duplexes, and four-unit apartments or condos would be acceptable. Additionally, the property must have been standing for at least one year, and all extensions to existing properties (added floors, rooms, etc.) must be directly attached to the older building. Homes that require razing can be approved for the loan, but at least part of the old foundation must remain.

Condos

The 203k loan requirements and qualifications surrounding condominiums can be a bit tricky, since these buildings have multiple units with multiple owners. Individual condo units can be rehabilitation with a 203k construction loan, but they must be specially approved by the FHA. Renovation is also restricted to the inside of the unit, since any exterior areas may infringe on the ownership rights of the condominium association. Most importantly, the area being renovated must consist of no more than four different units, in keeping with the FHA construction loan requirements.

Other Multiple Family Dwellings

Condos are one of the more difficult properties to renovate and manage under an FHA loan. The 203k loan requirements for other multiple-unit dwellings are a bit more straightforward. A townhouse, for example, is considered one structure, so up to four attached townhouses can be rehabilitated under a 203k loan.

Final Thoughts on 203K Loan Requirements

Once a 203k loan application has gone through and a property owner is ready to begin building, they will need to select a contractor. It is always best to work with a contracting group familiar with the FHA 203K and can help homeowners through the entire construction process.

• Those interested in applying for a 203k mortgage can choose from either a regular or streamlined (or modified) loan. Regular mortgages are granted according to the “as-is” value of the building plus the cost of renovation, or by calculating 110% of the expected value after the remodel. These mortgages are best for those buildings that need major structural repairs. Streamlined mortgages are best for homes that need minor repairs or upgrades, especially since the maximum amount allotted is $35,000. Both, however, can also be put toward refinancing costs.  Some lenders offer either regular or streamlined 203K loans.  Be sure to ask your lender what product they have available.

with contributions by D. Sawicki