203K Home Buyer Loan: What Is It and Who's Eligible

Photo: Marcus Q/flickrThe 203K is a home-ownership loan program originated by the Federal Housing Administration (FHA), which is a division of the Department of Housing and Urban Development (HUD). This type of FHA-guaranteed mortgage loan can allow you to either buy a home that's in poor shape and fix it up, or refinance and repair your current home. The loan comes in two types:

1. A regular 203K is suitable for homes that require structural repair. You will receive an amount equal to the property's as-is value plus the cost of repair OR 110 percent of the estimated value of the home after repairs.

2. A streamlined 203K is faster to process and is more easily obtainable these days. It applies to fixer-uppers that need only non-structural repairs. In this case, the loan amounts to the purchase price plus $35,000.

Due to the increased workload in processing a 203K, it will cost up to 1 percent more than a conventional home loan. Although it may involve additional closing costs as well, a 203K loan might be the only viable route to ownership of a property considered unfit for habitation.

What type of work is covered?

Beyond the property's purchase price, a 203K loan will extend to repairs (such as site grading and drainage or mitigation of lead paint issues), certain upgrades (painting, remodeling, disabled access, among others), and additions (a room, story, or deck), all subject to approval by HUD. Normally the work is to be completed within 140 days. Some improvements -- for example, a swimming pool -- are considered luxuries and therefore not permitted. The loan covers both materials and labor and can even be structured to include a contingency fund of up to 20 percent in case repair expenses exceed the estimates.

Who's an eligible buyer?

Both first time and veteran home buyers are eligible for 203K loans. To qualify, you will need to meet the FHA's normal criteria for loan eligibility -- a verifiable, steady source of income and an acceptable credit rating. You'll also be required to use the property as your primary residence. The down payment necessary is quite small: just 3.5 percent of the total of purchase price plus repair costs.

What's an eligible property?

This form of loan applies only to existing construction finished one year or more ago. Although the number of foreclosures and short sales has gone down, there are still homes available that meet the 203K loan criteria. They may be in poor shape after being used as rental properties, with all the wear and tear that involves, or perhaps they are an inheritance which is being sold off for quick cash.

Types of properties that can be financed by this kind of loan are:

  • Dwellings for one to four families, including condos approved by the FHA

  • The residential portions of mixed-use properties

  • Houses that the buyer plans to transport to a new location

  • Tear-downs, where the buyer will rebuild on at least part of the current foundation.

What else is needed?

There are 2 key personnel for your application: 1) a HUD Consultant to inspect and hopefully approve the property you're considering, and 2) a financial institution officer who is willing to lend you the money, preferably one who has experience with 203K loans.

Another must is a reliable, bona fide contractor to perform the repairs in compliance with local code and the HUD energy efficiency standards. You can't take out a 203K to purchase a home in Phoenix AZ, for example, and proceed to fix it yourself -- or get your brother or sister-in-law to do it -- unless they are a licensed Phoenix contractor, that is.

The necessary paperwork includes: A) a proposal detailing planned work with a cost estimate and B) an appraisal of the home's future value including repairs. You may be asked to provide an as-is appraisal, too. Start the process with a simple online application.

Laura Firszt writes for networx.com.

Updated December 16, 2018.

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