FHA Freqently Asked Questions
Are you interested in purchasing a fixer-upper home? If you know that the home you want to buy needs repairs and you are worried that you can not get enough money back from your mortgage to make these repairs, then you should know about the Section 203(k) program offered by the FHA. Through this program you can purchase a home and get the money you need to fix-up the home financed into the mortgage.
For instance, if you want to purchase a home that is currently valued at $100,000 but it needs $20,000 worth of repairs many mortgage companies will not lend you more than the appraisal value of the home. With the FHA 203(k) program you can borrow the money to purchase the home and fix it up.
Here are some questions that are commonly asked about the FHA 203(k) program:
- The FHA does not directly loan you the money, but you have to go through their loan approval process to get your mortgage.
- You contact the FHA and get a list of their approved lenders. You must use one of their approved lenders in order to get this type of secured loan through the FHA 203(k) program.
- You work with the lender and submit a mortgage package. This package includes your personal information, employment information, income, credit check, and more.
- Once you have submitted all of the necessary information to the FHA approved lender they process your loan request with the FHA.
- You get pre-approved and can begin the process of purchasing a home.
Why do I have to go through an FHA approved lender?
The FHA and HUD do not loan you the money directly. Instead they guarantee your loan with one of their approved lenders which makes it easier to get a home loan because the lender has the assurance from the FHA that in the case you default on the loan they will recapture some of their money.
Where do I find an FHA approved lender?
To find an FHA and HUD approved lender, check out HUD-approved lenders . Submit the information regarding what state and area you live in and you will find a list of lenders in your vicinity.
What types of homes can I purchase through the FHA 203(k) program?
You can use the program to purchase single family homes, up to four unit buildings as long as you live in one of them, and condominiums. There are certain restrictions for condominium repairs that you should consult your FHA approved lender about before purchasing.
Do I have to live in the home I purchase?
Yes. The FHA requires you to occupy the property you purchase.
Can I convert a single-family home into a multi-family home?
Yes. The FHA allows you to use the rehabilitation money from the loan to convert a single-family home into up to a four-unit home. The FHA also allows you to use the loan to move existing homes onto a new site if necessary.
What if the home I want to purchase need torn down and re-built, can I use the FHA 203(k) loan program for this?
Yes under certain circumstances. If you need to tear down the existing home and re-build a new home then you can use the 203(k) loan money as long as you are able to use some of the existing foundation.
Are there certain repairs that are required by the FHA?
Yes. The FHA requires you to meet current building standards for energy efficiency. If you are rehabilitating a home than these standards include:
- Ventilation in crawl spaces and attics.
- There must be weather stripping on all windows and doors.
- All outward facing walls and ceilings of the home must be insulated. The air conditioning, heating, and ventilation pipes and ducts must also be insulated.
- All cracks and openings from the interior to the exterior of the home must be sealed.
- Every bedroom must have a smoke detector.
How much can I borrow with an FHA 203(k) loan?
You can borrow up to 110% of the value of the home AFTER the repairs and rehabilitation of the home. The FHA will do a current value appraisal of the home in order to see what it is worth now. Then they will consider all of the rehabilitation you plan to do and do a second appraisal for what the home will be worth after the repairs have been made to the home. If you plan to install solar energy systems as part of your rehabilitation the FHA will insure up to 20% more of your mortgage values which means your lender will loan you more for your repairs and it will be easier to qualify for the loan.
Is there a minimum amount I need to borrow to make home improvements under the 203(k) program?
Yes. The FHA requires you to borrow at least $5,000 for repairs to the home in order to use the 203(k) program.
What improvements are allowed by the FHA?
The FHA requires you to make your home more energy efficient, but optional repairs that you can finance into your loan include:
- Repair to the structure of the home. This includes framing, chimneys, foundations, siding, new additions to the home, roofing, basement finishing, and more.
- Repair or the new building of bathrooms.
- New windows and/or skylights.
- Remodeling kitchens and new appliances.
- All types of flooring repairs or new flooring.
- Any repairs that are needed for safety like mold removal or lead paint.
- Repair to internal systems of the home like electrical, plumbing, heating, air conditioning, and ventilation.
- Repair or replacement of wells and septic systems (note that these repairs must be done first).
- Remodeling including new light fixtures, bathroom fixtures (even whirlpool bathtubs), painting, and more.
- Outdoor improvements including decks, patios, covered porches, landscaping, walkways, driveways, fencing, and more.
- Any rehabilitation that is necessary due to accessibility reasons for disabled people.
Once I have the loan money how long to I have to make the necessary improvements and repairs?
When you get a FHA 203(k) loan yo sign an agreement that specifies what time frame you have to complete the repairs. You have to begin the rehabilitation within 30 days of signing the agreement and receiving the money. The rehabilitation must be completed within 6 months and any pause in the work can not last for more than 30 days straight. This means that if you have different contractors working on different parts of your rehabilitation plan you need to make sure that there is not more than a 30 day stretch between the end and start of each contractor.
What if there is a problem and I don't get the rehabilitation work done as agreed?
If you foresee a problem with the agreement then contact your lender immediately. They may be able to help you with a solution. If you break your contract then you will not be able to access the escrow account with your home rehabilitation money. This money will be held and if unused it may go back into your mortgage loan to lower your owed balance. Because of this you want to make sure and be ready to have the work done before you sign the agreement.
What if the price of the repairs increases once the work begins, can I borrow more money to cover the cost?
No. You need to find a contractor that can give you an accurate price before you take out your loan. Once you have the loan you can not borrow more money. Discuss this with your contractor when you have the estimate done so that they know you can not afford to go over the estimated cost.
I am not going to live in my home while it is being repaired, do I still have to make the mortgage payments out-of-pocket?
No. You do have to make the mortgage payments, but the FHA allows you to include the cost of your first 6 months of mortgage payments into the loan so that you do not have to try and bare the burden of paying your new mortgage and rent to live somewhere while you home is being rehabilitated.