RENOVATION LOANS

3(k) Renovation Loan is a government-backed mortgage that combines the costs of a home purchase (or refinance) with the costs of home renovations. The FHA 203(k) Renovation Loan offers homeowners and home buyers an easier way to pay for home remodeling costs. 

While a typical home improvement loan can be complicated and costly – with higher interest rates and shorter repayment terms – a 203(k) Renovation Loan is a single, long-term loan with one application, one approval process, one closing, and one mortgage payment.  

203(k) ELIGIBILITY 

Since 203(k) Loans are backed by the FHA, they follow the same requirements as a standard FHA Loan. Anyone can apply for a 203(k) Loan, provided that you meet all the 203(k) Loan requirements: 

• Proof of employment history and verifiable income
• A minimum credit score of 620
• A debt-to-income ratio (DTI) of 43% or less (see below)
• A minimum of $5,000 in repair costs 
• Mortgage and repair costs that fall within FHA Loan limits in your area
• The home must be your primary residence and the property must meet HUD guidelines
• Up to 2 year waiting period if you’ve experienced bankruptcy and up to 3 years after a foreclosure

203(k) Loan Credit Score Requirements

As with a regular FHA Loan, an FHA 203(k) Home Renovation Loan has a minimum FICO® credit score requirement of 620. However, the higher your credit score, the lower down payment you will be eligible to make. Building your credit score before applying for a 203(k) Loan is good idea. You can get a free copy of your credit report at annualcreditreport.com (this is your credit report and does not include your credit score).

203(k) Loan Debt-to-Income (DTI) Requirements

When applying for an FHA insured loan, like a 203(k) Loan, you should strive for a DTI lower than 43% – anything higher might not qualify for a loan approval. Your DTI is your total recurring monthly debts (student loans, credit card payments, etc.), divided by your monthly pre-tax income, expressed as a percentage.  For example, if your rent is $1,000 per month, your car payment is $500 per month, and your monthly credit card payment is $800, your total monthly debt is $2,300. If your gross income is $6,000 per month, then your DTI is roughly 38% (2,300 ÷ 6,000 = 38.3).

Mortgage Insurance Premium (MIP) for 203(k) Loans

A Mortgage Insurance Premium (MIP) is required when you finance with an FHA Loan. Your MIPs contribute to the insurance fund the government maintains, should borrowers default on their loans. When you close on your home purchase with an 203(k) Loan, you pay an upfront mortgage insurance premium of 1.75% of the home’s purchase price. A recurring annual mortgage insurance premium of 0.45% to 1.05% of your loan amount (depending on the loan term), is added to your monthly payment.
MIPs are not cancellable.

Types of 203(k) Loans

The two types of FHA 203(k) Renovation Loans include the Standard 203(k) and the Limited 203(k) (formerly known as the Streamline 203(k)). For the most part, these loans work the same way and have similar eligibility criteria. But there are some key differences as well: 

• Limited 203(k) — Repair maximum of $35,000. Home must be habitable while undergoing renovations. No structural changes allowed. Half of payment required when renovations begin, half when they are completed. 
• Standard 203(k) — No repair price limit. Home can be uninhabitable during renovations. Structural changes allowed. Phased payment schedule.

Properties Eligible for 203(k) Loans

As with FHA Loans, 203(k) Loans are only permitted for 1 – 4-unit primary residences. This can include townhouses or condos. In addition to the typical FHA property requirements, an FHA 203(k) Loan requires that the home be at least one year old. FHA 203(k) Loans cannot be used to finance new construction homes. Additionally, the property must meet the FHA Loan limits for your area.

203(k) Loan Renovations

Home improvement projects that can be financed with a 203(k) Home Renovation Loan include: 

• remodeling bathrooms or kitchens
• replacing your roof or gutters
• adding bedrooms
• replacing flooring
• building a garage
• finishing a basement
• upgrading plumbing or heating systems
• fixing safety hazards
• adding disability access
• installing a septic unit
• adding a porch or deck
• installing energy-friendly features

Examples of costs not covered by a 203(k) loan include the addition of a pool or outdoor fireplace (existing pools can be repaired), adding satellite dishes, building barbecue pits, paving tennis courts, or making other ‘luxury’ feature additions.

How to Apply for a 203(k) Loan

You will need to apply with an FHA 203(k) approved lender and provide the following:

• Proof of income and employment (pay stubs, tax returns, W-2 statements etc.)
• Documentation of financial assets (bank statements, etc.)
• Residential history (previous two years’ worth)
• Your credit history 
• Identity information like your driver’s license, Social Security card, and date of birth in order to apply

The HomeStyle® Renovation Loan can help you both purchase AND rehab your next home. The purchase price and renovation costs are combined into ONE loan with one monthly payment. You can borrow money based on the value of the home AFTER the renovations are completed.

Ways to use HomeStyle® Renovation

• Kitchen and bathroom remodels including built-in appliances

• Flooring and painting

• Roofing, gutters, and downspouts

• Repair, replace, or install plumbing, HVAC, and electrical systems

• Energy efficiency improvements

• Landscape and site improvements

• New in-ground swimming pools, BBQ islands, decks, walkways, and patios

• Structural alterations, additions, including Additional Dwelling Units (ADUs)

Combine the benefits of HomeStyle® Renovation with other Fannie Mae products

HomeStyle® Energy

If you are planning on ENERGY STAR® certified improvements, resiliency, water, or other energy upgrades, then the HomeStyle® Renovation loan may be bundled with HomeStyle® Energy to qualify for a $500 LLPA credit.

HomeReady®

Unlike FHA Loans, this low down payment mortgage has lower rates and cancellable mortgage insurance. When combined with a HomeStyle® Renovation Loan HomeReady® makes financing renovation projects even more affordable.

Eligible Properties:

Requirements

• 1-4 unit primary home
• 1 unit investment home
• 2nd/seasonal homes
• Condo FNMA eligible & PUD

Repair Amounts:

• No minimum
• Max reno amount CANNOT exceed 75% of the as- completed value

Repair Types:

• Structural & non-structural
• Landscaping or site amenities acceptable

Loan-to- Value:

• Primary 1-Unit 97%, 2-Unit 85%, 3-4 Unit75%
• 2nd Home: 90%
• Investment: 1-Unit 85%

Credit Score:

• 620 min