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What is a 203k?

The Federal Housing Authority, aka FHA, has designed a mortgage that structures the repairs directly into the mortgage. This is usually on the purchase of a home that needs a fair amount of fixing up. One of the many advantages of a 203k is that all the repairs are completed after closing. This is unlike the conventional home sale where the seller makes the repairs before closing. This allows the home buyer to repair and modify the home to their liking. An inspection of the property is required by either a consultant or the appraiser. This inspection determines what repairs will be required according to the FHA Property Minimum Standards. You will need to find a contractor to do the work because the borrower is not allowed to do their own work without special authorization from the lender.

There are 2 types of 203k renovation mortgages:

The Limited 203k

The Limited 203k mortgage is designed for simple minor repairs. There must be at least $5,000 in repairs but not more than $35,000. There is a 10% contingency held by the lender. This contingency will reduce the actual repair amount to $31,500. When the 10% ($3,500) contingency is added to the $31,500 this will bring it up to the $35,000 maximum total for a Limited 203k. As long as the repairs with contingency don’t exceed $35,000 and there are not structural problems with the house, the Limited 203k will work. If there are any structural repairs you will need the Standard 203k. Structural repairs and repairs over $35,000 will required a Full 203k and the aid of a FHA 203k Consultant. Even though a Consultant is not required for the Limited 203k it is highly recommended to hire a Certified FHA 203k Consultant. Their expertise is well worth the few extra dollars it will cost. Many Limited 203k’s fail because the borrower and/or the Realtor don’t totally understand it the process. There can be issues that develop that will require a consultant anyway. A Consultant can foresee these issues and many times a Consultant will be asked to finish what the borrower had started only to discover they have run out of time or need to start the process from the beginning. Had a Consultant been there from the beginning the process would have gone much more smoothly.

The Standard 203k

The Standard 203k mortgage is designed for major repairs and renovations. The loan limit is based on the after repair value or the total amount the borrower qualifies for, which ever is less. There are a few other limitations but we won’t discuss them at this time.

With the Standard 203k a consultant is required to orchestrate the entire project. The job of a Consultant is to make sure the project fits the budget, checks the quality of the work, conducts Draw inspections so the contractor can get paid for his work. The Consultant also handles all the paperwork that is required throughout the project. The Consultant fees are minimal for the required amount of work they have to do.