There are two different types of 203(k) loans -- the traditional loan and the streamline version. If you're not making any structural changes to the dwelling and your renovations are under $35,000, the streamline version is for you. A streamline 203(k) is the easiest version to secure. It usually pays 50 percent up front and makes the final deposit upon completion of the renovations. The streamline loan often doesn't require a final inspection phase of the loan [source: Blackwell].
If you're making any structural improvements, or your total improvements cost more than $35,000, the traditional 203(k) loan is your only option. For this loan, inspections are required, and you must agree on a payment schedule with your lender that complements your renovation schedule. Usually, money is paid out of an escrow account as each phase is completed and an inspector has verified the work is finished [source: HUD]. Although some lenders may allow you to set up a contingency account just in case you exceed your renovation estimate, you can borrow only 110 percent of the as-is value of the house, leaving you just 10 percent of the as-is value to complete your renovations [source: Fontinelle]. You must also put 3.5 percent of the offer price down on the loan at closing.
As you begin the process of securing a 203(k) loan and purchasing a property, remember that you're getting a really sweet deal. The government is allowing you to purchase a home in need of repair and helping make the renovation process easier and more cost-effective for you. With this in mind, you'll be able to deal with the small frustrations the loan securing process can cause. First, it might be more difficult to find a lender using a 203(k) loan. Even though HUD provides access to the loan, you still have to finance through a bank, which will determine your interest rate. Once you find a lender who will work with you, keep in mind the closing process for a 203(k) loan is longer than a typical loan. Account for anywhere from 60 to 90 days for closing compared to the typical 30- to 45-day closing period [source: Fontinelle].
Once you finally close on your new home, be ready to start renovations immediately. All renovations using 203(k) loan money must be completed within six months of your closing date [source: Fontinelle]. This shouldn't be a problem though, because a full renovation proposal is required during the application process, so you should already have all of your renovation decisions made at closing.
Once your renovations are completed, a HUD-approved inspector will certify that all work is finalized according to your approved plan (or any approved change orders). This final approval from the inspector will release your remaining escrow funds. If you're lucky enough to have come in under budget, the remaining escrow funds will be paid toward your mortgage principal. All you have to do after your final draw is released is enjoy your newly renovated home, and of course pay your monthly mortgage payments and reduced utility bills made possible by your green renovations.
- Blackwell, Jonathan. "FHA 203K - Your Path to Green Renovation." GoGreenWithFHA.com. (Jan. 28, 2011)http://www.gogreenwithfha.com/fha-203k-your-path-to-green-renovations/
- Fontinelle, Amy. "An introduction to the FHA 203(k) loan." MSN Real Estate. Oct. 8, 2010. (Jan. 28, 2011)http://realestate.msn.com/article.aspx?cp-documentid=25854505
- Fontinelle, Amy. "Applying For An FHA 203(k) Loan." Yahoo Finance. Aug. 26, 2010. (Jan. 28, 2011)http://finance.yahoo.com/news/Applying-For-An-FHA-203k-investopedia-3929271973.html?x=0&.v=1
- Hevron, JR. "3 Ways to Get Paid for Cost-Saving, Green Home Upgrades." Oct. 22, 2010. (Jan. 28, 2011)http://www.thedailygreen.com/green-homes/eco-friendly/energy-efficient-mortgages-pace-203k-461010
- U.S. Department of Housing and Urban Development (HUD). "Rehab a Home w/HUD's 203(k)." June 29, 2010. (Jan. 28, 2011)http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm
- U.S. Department of Housing and Urban Development (HUD). "Valuation Analysis for Single Family One- to Four-Unit Dwellings (Appendix B: Special Programs)." July 1, 1999. (Jan. 28, 2011)http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4150.2/