How Does a 203k Loan Work

The first step, is to apply for a basic FHA Home Loan. Once Pre-Approved, begin your search for the perfect home.

If the home you find needs a little tender-loving care, or some updates, like a new roof, contact your Cambria Mortgage Loan Officer to discuss the property condition, and what items may need repair.

There are likely some items that the FHA program will require to be repaired to buy the home, and of course some items that you would love to upgrade or improve.  We refer to these as needs and wants.

Once you are sure the home will fit the basic FHA 203k loan requirements, the smart next move is to get a bid for the repair work from a licensed contractor.

You are NOT allowed to do any of the repairs yourself under the 203k loan program.

Some people guess on the cost of repair, and make an offer WITHOUT a contractors bid.  We have seen way too many of these be way off, so offering on a house without a contracts bid is strongly not advisable.

Now knowing your offer price for the house, and the repair bid in hand, decide if buying this particular house makes sense.  If it does, go ahead and make your offer.

Processing a 203k Loan

Once you have an accepted offer, the basic loan underwriting process is fairly standard compared to other mortgage loans, with a few additional items needed:

1) Copy of the bid(s)

2) Signed contractor agreements between you and the contractor

3) Copy of contractors license, insurance, references, and a signed W9

4) Write up from 203k consultant if repairs over $35,000

Due to the additional contractor requirements, it is strongly advisable to make sure you have at least 60-days between your offer to purchase the home and any anticipated closing date.

Once finally approved, the loan closing like normal. The seller and the real estate agent get paid right away.  The contractor gets 1/2 of the repair money right away, and the second 1/2 of the repair money upon proof of completion of the repair work.

203k Loan Appraisal

Once we have your signed application, a copy of the purchase agreement, a copy of the bids, and all of the contractor documents, we can order the appraisal.

The appraisal must say two important things. First, that the house is worth what you are buying it for today, and second, what the appraisal believes the house will be worth after repairs are completed.

The after repair value must be within 110% of the cost to buy the house plus the cost of repairs in order to qualify.

Repair Contingency Fund

A contingency fund is required for any cost over runs. The required contingency will range from 10% – 20% of the amount of the repair bid.

These funds are collected along with the amount listed on the bid from your general contractor, and kept in escrow should something unexpected happen along the way. Should your general contractor needs the funds he/she will file a change order, and upon review, we will release the funds.

If nothing unexpected occurs, the unused contingency money will be credited back to you as principal reduction on the amount of your loan.

Full 203k Loan, or Streamline 203k Loan

There are two major 203k sub-programs, known as a full 203k, or the streamlined 203k.

The vast majority of people only need the streamline 203k, which allows for most common repairs, and up to $35,000 in repair costs.

The full 203k allows for repairs over $35,000, and also allows for more extreme repairs, like moving walls, adding additions, etc.

Allowable Repairs With a 203k Streamline Loan

• Roof repair, gutters, downspouts
• Existing HVAC systems
• Plumbing and electrical systems
• Flooring
• Painting
• Appliances
• Weatherization
• Repair, replace or add exterior decks, patios, porches
• Basement waterproofing
• Window and door replacement and exterior siding
• Septic and/or well repair or replacement
• Improvements for accessibility
• Lead-based paint stabilization or abatement of lead-based paint hazards

What can’t you do? Ineligible improvements under the Streamlined 203(k):

• NO major structural repairs
• NO new construction (adding a room)
• NO Repair of structural damage
• NO Repairs requiring detailed plans and specs
• NO Repair taking more than 3 months to complete
• NO Repairs that would necessitate more than 2 draws
• NO Luxury items that are not a permanent part of the real estate
• NO Jacuzzi tubs, hot tubs, pools

Here are a few details of the FULL 203k loan:

• A 203k consultant is required to be used
• For project costing over $35,000
• Major items (such as foundation, structural items, and additions) ARE allowed