Exciting News for Homebuyers: HUD Updates FHA 203(k) Program

Long-awaited updates to HUD’s FHA 203(k) program are here

This week, the U.S. Department of Housing and Urban Development (HUD) announced a newly updated set of policies for its 203(k) program. The action follows a proposal made last fall by the FHA to enhance the program.

If you’re planning to buy or refinance a fixer-upper on or after November 4, 2024, these much-needed changes will make the 203(k) loan program one to consider for your financing needs.

What is FHA’s 203(k) loan program?

An FHA 203(k) loan is a special kind of mortgage backed by the Federal Housing Administration (FHA) that bundles the cost of repairs, improvements, or upgrades into a single loan. This means you can buy or refinance a home and finance the renovation costs all in one go.

The program allows for structural repairs like foundations and new roofs, kitchen and bathroom modernizations, and even making your home more energy-efficient and climate-resilient.

Here’s how it works: part of the 203(k) loan balance is allocated to buying the home or paying off an existing mortgage, while the rest is held in an escrow account to cover rehabilitation costs as the work is completed, similar to a construction loan.

203(k) loans can be either a fixed-rate or adjustable-rate mortgage (ARM).

What's new with 203(k) loans?

The FHA offers two versions of the 203(k) loan program.

Standard 203(k): Intended for substantial remodeling and repairs

Limited 203(k): Meant for minor remodeling and nonstructural repairs.

Now, let’s talk about the exciting updates:

• Higher Rehab Costs: The Limited Program’s max rehab cost has jumped from $35,000 to $75,000. Initially, the FHA proposed $50,000, with $75,000 for high-cost areas, but now $75,000 is the new limit across the board. This will be reviewed annually.
• Consultant’s Fee: You can now include the approved Consultant’s fee in your mortgage amount under the Limited Program, just like the Standard Program.
• Extended Timelines: The Standard Program’s rehab period is extended from six to twelve months, and the Limited Program from six to nine months. More time to get those big projects done right.
• Mortgage Payment Reserve: The permissible reserve period under the Standard Program, covering mortgage payments while your home is uninhabitable due to renovations, is now twelve months.
• Repair Criteria: The FHA has changed how they define a “major” repair in the Limited Program. Before, if a repair made your home unlivable for more than 15 days, it was considered a major one. Now, they’ve increased this period to 30 days. This means a repair will only be labeled as “major” if it keeps you from living in your home for over 30 days, giving you more flexibility with smaller projects.
• Updated Consultant Fees: Higher maximum fees for Consultants, along with other Consultant-related changes, including a two-year approval validity for FHA 203(k) Consultants and specific selection criteria for Consultants used in the Limited Program.

Additionally, for the Limited Program, when an FHA-approved 203(k) Consultant is used, your lender will need to select a Consultant who is active on the FHA 203(k) Consultant roster for the state where the property is located. Lenders must also avoid using Consultants with a history of poor performance, as determined by lender reviews.

Similar requirements are already in place for Consultants under the Standard Program.

Why the 203(k) updates were necessary 

Although the Federal Housing Administration’s (FHA) 203(k) loan is highly praised, its usage has been limited in recent years due to the program’s outdated elements.

Recent data shows that only 4,478 203(k) loans were issued in 2022, accounting for just 0.5% of total FHA originations. The Urban Institute noted a decline in program use, with only 299 loans issued in January 2023, compared to an average of 1,330 loans per month between 2015 and 2017.

HUD anticipates the program enhancements to significantly increase usage of the rehab loan and is a key component of the current Administration’s efforts to address the nation’s housing supply challenges.

“HUD has programs not only to help families purchase a house, but to help them repair their homes,” said HUD Acting Secretary Adrianne Todman. “Today, we are modernizing and expanding this program, helping both homebuyers and homeowners fix up their homes.”

According to HUD, the changes “will modernize the program and enhance their usefulness for homeowners seeking affordable financing for renovating or rehabbing a single-family home when purchasing or refinancing it.”

How to get an FHA 203(k) loan

Once you’ve found a home you want to purchase and renovate, or you’ve decided on some home improvements for your existing home, you can apply for a 203(k) loan with your lender and begin your projects.

The process involves the following steps:

1. Assign a Consultant (if needed): If you’re using the Standard 203(k) loan, your lender will assign a 203(k) Consultant to your project. The Consultant will visit the home to estimate repair costs. For the Limited 203(k) loan, working with a Consultant is optional.
2. Work with a Contractor: After the lender approves the Consultant’s estimates and closes the loan, you’ll collaborate with a licensed contractor to carry out the renovations. It’s beneficial to choose a contractor familiar with 203(k) loans, particularly regarding the payment schedule and requirements.
3. Complete the Work: The renovation process then follows the structure of a typical construction loan. The lender disburses payments to the borrower at various stages of the renovation. As the project progresses, the Consultant inspects the work to authorize further payments. You’ll have six months to complete the renovations.
4. Finish the Project: Once the renovations are complete, you’ll provide a release letter, and the Consultant will evaluate the work.

The bottom line on the FHA 203(k) updates

Understanding how the FHA 203(k) loan program works — and its limitations — will help you decide if it’s the best home improvement financing option for you.

With higher allowable renovation amounts and extended timelines, this program is now more flexible and attractive than ever. So, if you’re thinking about tackling a fixer-upper, the 203(k) loan might just be your perfect partner in turning that dream home into a reality.