A 203K loan is one which is offered by the FHA and is commonly referred to as a home renovation loan, because it includes the cost of both purchasing a home and renovating it. This kind of loan is generally applied for by individuals who have chosen to rehabilitate an older home, or one that has been damaged somehow.
This kind of purchase and renovation loan has the backing of the Federal Housing Administration, and is generally funded by mortgage lenders who specialize in extending 203K loans. There are two different options available when applying for a 203K loan, and these are known as the standard loan and the streamlined versions of the loan.
Standard versus streamlined loans
The standard version of the 203K loan is intended to cover the cost of more extensive renovation projects. Typically, this would include structural repairs which make it impossible to live in the home while it is being repaired. For less extensive types of repairs, a streamline 203K loan would probably be sufficient.The streamlined version of this loan is meant for making cosmetic repairs which do not exceed $35,000 in cost. When applying for streamlined 203K loan, you can still apply for a mortgage which provides you with enough money to purchase your home and make any necessary repairs. This streamlines the process considerably, since you would otherwise have to apply for a purchase loan mortgage and a rehabilitation loan separately.
How the streamlined loan works
It will generally be necessary for an appraiser to provide you with a list of recommended repairs, and in many cases these repairs would actually be required. Then you would need to get a bid from an HUD contractor, and provide this to your lender. The most amount of money you could receive through a streamlined loan is $35,000.
You will have a certain amount of time to complete the needed repairs before final appraisal, and when construction is finished, you’ll be ready for the closing procedure. Some of the different kinds of work which are allowable under this kind of loan include weather proofing, flooring, painting, enhancement to electrical or plumbing systems, roofing improvements or repairs, septic or well replacement, repairs to decks and patios, basement waterproofing, addition of appliances, and improvements for accessibility.
How the standard loan works
Just like the streamlined version, a standard 203K loan permits you to obtain a single loan to cover the cost of both the purchase and any repairs. The big difference is that the standard loan is meant to cover the cost of major repairs, and there is no ceiling on the amount of money you can borrow for those repairs. Obviously this will require a bit more paperwork than the streamlined version, and buyers are not allowed to occupy the home while structural enhancements are being made.
An HUD consultant will be assigned to supervise all work carried out on the structure. Many loan applicants are deterred from applying for the standard 203K loan because of the significantly greater paperwork involved. The kind of repairs which are permissible under a standard 203K construction loan are as follows: structural repairs, relocation of a load-bearing wall, landscaping, repairs which require architectural drawings, new construction such as additional rooms, enhancements which require a plan reviewer, repairs which require longer than three months, and repairs which require more than two payments to a specialized contractor.