Qualifying For An FHA 203k Loan

FHA’s primary goal is to help borrowers purchase a home they may not otherwise be able to finance based on the down payment requirements of most conventional loan programs.. To further that goal, FHA offers favorable loan terms, higher loan limits, and flexible down payment options to qualified buyers.

While candidates are not required to have as large a down payment or the income amounts mandated by many conventional loan programs, they will need to show evidence of a steady, verifiable income and a good credit score.

Credit qualification, loan limits and other requirements for all FHA 203k loans are the same as regular FHA loans. Borrowers must demonstrate the willingness and ability to repay the loan. Like regular FHA loans, maximum loan amounts depend on the property’s location.

The distinct difference between regular FHA loans and the 203k programs is that 203k rehabilitation loans are specifically designed to offer loans on distressed, outdated, uninhabitable or poorly maintained properties that may be unable to qualify for conventional loan programs.

In addition to the purchase price of the home, the FHA 203k loan allows the borrower to project costs and include the funds needed for the rehabilitation and related expenses, such as materials and labor.

Down Payment Requirements

As a down payment, a minimum 3.5% of the total amount of the home’s purchase price plus the cost of repairs is required. Conventional loans typically require a 10%-20% down payment.

Contingency Reserve and Mortgage Payment Coverage

The 203(k) loan also allows the borrower to include a 10-20% contingency reserve for expenses above and beyond repair estimates, as well as up to six months of loan payments to cover the mortgage while renovating.

Two Types of 203k Mortgages

FHA offers two types of FHA 203k mortgages: the Standard 203k, (also called “Full or “Regular”) and the Streamlined 203k. Both loan types can be used for purchase and refinance.

Streamlined 203k

The streamlined 203k is designed for homes that need cosmetic, non-structural modifications. The Streamlined loan allows home buyers to add a maximum of $35,000 to the purchase price to pay for improvements.

Standard 203k

The Standard 203k) was created specifically for properties that need structural repairs, such as the relocation of a bearing wall. The maximum mortgage amount allowed for a standard 203k is based on whichever is less:

The as-is value of the property plus the costs of repair and rehabilitation,
or 110% of the projected value of the renovated property.

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