What is the FHA?
What is an FHA loan?
How is the FHA funded?
What are the benefits of an FHA loan?
What are FHA loan limits?
What is an FHA 203(k) loan?
FHA 203(k) loans are available in two types:
What improvements are eligible under the Streamlined 203(k)?
What items are ineligible for the Streamlined 203(k)?
Can the 203(k) program be only used on single-family homes?
How is the home appraised?
Can a 203(k) be used to purchase a HUD-owned property?
Is the 203(k) program available to investors?
Can an Energy Efficient Mortgage (EEM) be used in conjunction with the 203(k)?
How are loan funds disbursed for the purchase and renovation?
Is a borrower allowed to do the rehabilitation work?
What if there are extra funds after renovation?
Is there a time limit for the renovation?
What if the home is not habitable during renovation?
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 than 34 million 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 the U.S. Department 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 is not a lender. Instead the agency provides lenders with insurance that protects them against losses in the event of a homeowner’s mortgage default. This reduces the lender’s 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, however, to assure that their loans qualify for insurance.
The FHA is funded entirely by proceeds from mortgage insurance premiums that are included as part of the borrower’s mortgage payments. As a result, the FHA is the only government agency that is entirely self-funded – operating at no cost to American taxpayers. Additionally, the home construction and community development driven by FHA programs stimulate the economy through job creation, tax revenues and more.
The FHA identifies the following benefits:
The FHA sets limits on the maximum amount of loan funds available to a borrower relative to housing costs in a given area. In areas of the country with lower home values, limits are currently set at a maximum of $271,000 while in other areas, these limits go as high as $729,750. Even if the borrower’s creditworthiness and income would allow him to afford a larger mortgage, the lender will not allow the borrower to exceed the regional limits established for an FHA loan. To determine the current limits in a particular area, visit https://entp.hud.gov/idapp/html/hicostlook.cfm.
The FHA 203(k) renovation loan program provides funds for both the purchase and renovation of a home packaged into a single 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.
The purchase of a house in need of repair is often a catch-22 situation, because the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.
HUD’s 203(k) program can help overcome this obstacle by enabling the borrower to borrow funds for the purchase or refinance of a property plus the cost of making the repairs and improvements all in one mortgage. The FHA-insured 203(k) loan is provided through approved lenders nationwide and is available only to owner-occupants.
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.
The Streamlined 203(k) program is intended to facilitate uncomplicated rehabilitation and/or improvements to a home for which plans, consultants, engineers and/or architects are not required. This program allows discretionary improvements and/or repairs shown below:
Properties that require the following work items are not eligible for financing under the Streamlined 203(k):
Mortgagors may not use the Streamlined 203(k) program to finance any required repairs arising from the appraisal that do not appear on the list of Streamlined 203(k) eligible work items or that would:
The 203(k) loan program is eligible for use on single family homes as well as on 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. The program also allows for financing mixed-use building projects that combine retail or commercial space with residential space. In these cases, the 203(k) loan can only be used for renovation of the residential portion of the building.
The appraiser is given a copy of the contractor’s bid documents to identify the repairs and remodeling to be done along with the respective costs. The appraiser then determines the value of the home after completion, “subject to” the improvements to be made. In some cases up to 110% of this after-improved value may be used for loan approval purposes.
A 203(k) loan can be used to purchase a HUD-owned property that is determined by HUD to be eligible for the program. If other funds are used for the purchase, a 203(k) loan can be made up to six months following the purchase, allowing cash back to the owner.
A 203(k) loan can be used only by owner occupants, local governments or eligible non-profits. However, an owner occupant can use a 203k loan to purchase and renovate up to a 4-unit building as well as multi-use building in conformance with certain guidelines.
Yes, the FHA allows the use of an EEM, which provides funds beyond the FHA loan limits and the buyer’s approved loan amount for improvements that increase the energy efficiency and lower the utility costs of the home. An energy audit must be conducted by an approved home energy rater to assure that the energy savings over the useful life of the improvements will exceed their costs. The total amount of an EEM mortgage can be up to 5% of the value of the property.
At the loan closes, funds are disbursed for the home purchase and, based on previously submitted and accepted contractor bids, renovation funds are placed by the lender in an escrow account. These renovation funds are then drawn from that account to pay the contractors as the work proceeds, with final payments following inspection at completion. The actual disbursement schedule, inspections and paperwork required are determined by the lender for each project and in conformance with FHA guidelines.
Where a buyer can demonstrate professional expertise in a given activity, it is allowable. However, the borrower cannot be paid for labor, only materials used. Prior to loan approval, the cost estimate must reflect the cost for a contractor to do the work in the event the borrower is unable.
Any funds left over following completion of the renovation can be used to make additional allowable improvements to the property. If not used for this purpose, left over funds will be applied to pay down the principal balance of the mortgage.
The renovation must begin within 30 days of the closing of the loan and must be completed within the time frame established in the loan agreement. The total time for renovation must not exceed six months.
The Standard 203(k) loan does allow for up to six mortgage payments to be included in the renovation funds to cover the period when the home is uninhabitable during renovation. A streamlined 203(k), however, cannot be used if the home will not be habitable at any time during the renovation.
The parameters of FHA’s 203(k) mortgage insurance program are set up in a way that both homebuyers and current homeowners can take advantage of its many benefits so long as they qualify under the provisions of the program.