FHA 203k Eligible Property Types

Homes that have never been completed cannot be accepted into the 203K program; construction of the property must have been completed for at least one year. Evidence of completion would be a Certificate of Occupancy or other similar documentation from the local jurisdiction.

Homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided the existing foundation system is not affected and will still be used. The complete foundation system must remain in place. A report from a licensed structural engineer is required stating that the existing foundation is structurally sound and capable of supporting the proposed construction of the dwelling. Where the home has been completely razed (or where only the footings remain), including the demolition of the foundation, the property is not eligible for a 203K insured loan.

In addition to typical home rehabilitation projects, this program can be used to convert a one family dwelling to a two-, three-, or four-family dwelling. An existing multi-unit dwelling could be decreased to a one-to-four family unit.

An existing house on another site can be moved onto the mortgage property; however, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation.

Eligible FHA 203k Properties:

One to four-family dwelling that has been completed greater than one year.

  • Purchase or refinance
  • Move-ons
  • Condemned properties
  • REO properties
  • Condominiums in projects that have been approved by FHA (Interiors only)
  • Mixed use (business-no more than 25% for one floor properties, 49% for 2 floor properties, or 3% for 3 story)
  • Non-residential conversions to single family (1-4 units)

Properties Ineligible For 203k Loans:

  • Co-ops
  • Log Homes
  • Condotels
  • Manufactured Homes

FHA 203k Loan Contingency Reserve Requirements

When getting an FHA 203k loan, a contingency reserve is typically required to cover unexpected expenses.

On properties older than 30 years and over $7,000 in rehabilitation costs, the cost estimate must include a contingency reserve. The reserve must include a contingency reserve of a minimum of 10% of the cost of rehabilitation; however, the contingency reserve may not exceed 20% where major remodeling is contemplated.

If the utilities were not turned on for inspection, a minimum 15% is required. If the scope of work is well defined and uncomplicated, and the rehabilitation cost is less than $7,500, then lender may waive the requirement for a contingency reserve. A notice about the Contingency Reserve must be provided to the borrower prior to, or at the closing of the loan.

The contingency reserve can only be used on those changes that affect the health, safety, or an increase in cost due to a necessity item. If the contingency reserve is insufficient, the borrower must place additional monies into an account for payment upon acceptance of the change.

If a change order (use a Request for Change, Form HUD-92577), results in a decrease in costs, the amount will be added to the contingency reserve. Additional improvements that do not affect the health and safety, or an increase in cost due to a necessity item, must be paid for by the borrower and not paid out of the contingency reserve fund. If the work is complicated, a 10% to 20% contingency reserve may be added to the change order request.

Any unused portion of the Contingency Reserve Fund remaining at the time of issuance of the Final Release Notice must be applied to reduce the mortgage balance. Work items cannot be deleted from the rehabilitation if it will decrease the value of the home, since the loan has already closed.

If the borrower feels that the contingency reserve will not be used and they wish to avoid having the reserve applied to reduce the mortgage balance after issuance of the Final Release Notice, the borrower (or any other person, organization or agency on the borrower’s behalf) may place their own funds into the contingency reserve account.

In this case, if monies are remaining in the account after the Final Release Notice is issued, the monies may be released back to the borrower (or other person, organization or agency who placed the money in the contingency reserve).

FHA 203k Loan Required Repairs

If you are going to finance a home with a FHA 203k loan, there are some repairs that are mandatory if they are needed in order to secure the loan. All rehabilitation construction and/or additions financed with 203K mortgage proceeds must comply with the following:

Cost Effective Energy Conservation Standards

Addition to Existing Structure-New construction ,must conform with local codes and HUD Minimum Property Standards in 24 CFR Section 200.926d (HUD Handbook 4910.1, Appendix K) is required.

Rehabilitation of Existing Structure

To improve the thermal efficiency of the dwelling, the following are required:

  • Weather-strip all doors and windows to reduce infiltration of air when existing weather-stripping is inadequate or nonexistent.
  • Caulk or seal all openings, cracks or joints in the building envelope to reduce air infiltration
  • Insulate all openings in exterior walls where the cavity has been exposed as a result of the rehabilitation.
  • Insulate ceiling areas where necessary
  • Adequately ventilate attic and crawl space areas

Replacement Systems

Heating, ventilating, and air conditioning system supply and return pipes and ducts must be insulated whenever they run through unconditioned spaces.

Heating systems, burners, and air conditioning systems must be carefully sized to be no greater than 15%
oversized, except to satisfy the manufactures” next closest nominal size.

If new heating/cooling system is proposed, provide heat loss/heat gain calculations for the entire house to ensure proper sizing of heating system. Use the design criteria developed by the American Society of Heating, refrigerating and Air Conditioning Engineers (ASHRAE) or Manual J developed by the National Environmental Systems Contractors Association.

Smoke Detectors

Each sleeping area must be provided with a minimum of 1 approved, listed and labeled smoke detector installed adjacent to the sleeping area. The detector must sense visible or invisible particles of combustion. When activated, the detector must provide an alarm suitable to warn occupants within the sleeping area. Smoke detectors may be battery powered when installed in existing or rehabilitated dwellings. However, where new construction is being added to an existing building, the smoke detector must receive its primary power from building wiring, in conformance to local codes and ordinances.

Have more questions about the FHA 203k loan and what the required repairs are in your situation? Be sure to contact one of our FHA 203k loan experts today.

FHA 203k Loan Appraisal Requirements

FHA 203k Appraisal Requirements

All appraisals for FHA 203k loans must be completed by a HUD-approved appraiser. Properties considered in less than “average” condition by the appraiser are ineligible, unless the appraiser specifically states the required repairs will bring the property up to average condition.

Loan-to-Value

The LTV is based on the lesser of:

  • The sales price or “as is” appraised value plus borrower paid repairs minus excess sales concessions, or
  • 110% of “as completed” appraised value

When a 203(k) loan is coupled with an energy efficient mortgage, the base loan amount may exceed the county maximum up to $8,000.

The appraisal report must provide an “as completed” appraised value that estimates the value of the property after completion of the rehabilitation work. The borrower’s or cost consultant’s work write-up must be available for the appraiser to use in order to determine that “as completed” value.

In order to determine the maximum mortgage amount, the FHA 203(k) valuation analysis consists of 2 separate determinations of value as noted below.

“As-is” Value:

A separate appraisal may be required to determine the “as-is” value. However, it may be determined an “as-is” appraisal is not feasible or necessary. In this instance, the lender may use the contract sales price on a purchase transaction, or the existing debt on a refinance transaction, as the “as-is” value, when this does not exceed a reasonable estimate of value. If the appraiser completes an “as-is” appraisal and “as-repaired” appraisal, the appraiser may only charge one and one-half times the customary fee for an appraisal.

On refinance transactions, when a large amount of existing debt, for instance first and second mortgages, suggests that the borrower has little or no equity in the property, a current “as-is” appraisal must be obtained on which to base the estimated “as-is” value.

On a refinance, the borrower may have substantial equity in the property to assure that no further down payment is required on the new loan amount. In some cases, the borrower will not have an existing mortgage on the property. In this case, some comparables should be obtained from a real estate agent/broker/appraiser to estimate an approximate “as-is” value of the property.

Another way of establishing the “as-is” value is to obtain a copy of the local jurisdiction tax valuation on the property.

For a HUD-owned property, an “as-is” appraisal is not required and a request may be made to the HUD field office to release the outstanding HUD property disposition appraisal on the property to the Client to establish the maximum mortgage for the property. The HUD appraisal will be considered acceptable for use if:

  • It is not over 120 days old prior to bid acceptance from HUD, and
  • The sales contract price plus the cost of rehabilitation does not exceed 110% of the “as repaired value” shown on the HUD appraisal. If the HUD appraisal is insufficient, another appraisal may ordered to assure the market value of the property will be adequate to make the purchase of the property feasible.

For a HUD-property, the down payment is 3% of the accepted bid price of the property and 100% financing on all other costs.

Have more questions about the FHA 203k Loan Appraisal Requirements? Contact one of our FHA 203k loan experts today.