There are two types of FHA 203K loans. The type you need depends on the type and cost of the renovations. The two loans are the Limited 203K loan and the Standard FHA 203K loan.
Both loans provide funds to buy and renovate the property, the difference is in the type of renovations you can do and how involved the lender is in the process.
Limited FHA 203K Loan
The limited FHA 203K loan (sometimes called the streamline FHA 203K loan), is mostly for borrowers looking to make cosmetic changes. You cannot make any structural changes with this loan, but the paperwork to complete the process is much less intense.
A key factor in qualifying for the limited FHA 203K loan is whether the home is livable. If you can live in the home during the renovations, it might be eligible for the limited 203K program.
The other determining factor is the cost. The limited 203K loan additional loan funds of up to $35,000 in addition to the acquisition costs. The $35,000 includes the 15% emergency buffer required should the unexpected occur. This means your renovation costs can be up to $31,000, leaving enough room for the buffer.
As we said, the renovations must be non-structural, and they must also be ‘non-luxury.’ The options are endless, but here are some renovations you can make with the FHA 203K loan:
- Minor (non-structural) kitchen and bathroom renovations
- New flooring
- New paint (interior or exterior)
- New roof
- New windows and doors
- New appliances
- Accessibility changes for people with disabilities
- Basement remodeling (non-structural)
- Any other minor renovations
Obviously, these changes do not include any room additions, knocking down walls, or addition of walls.
With the limited 203K program, contractors receive their payments in 2 installments. They receive 50% when work begins (when the loan closes) and the remaining 50% when the work is complete and approved.
Standard FHA 203K Loan
The standard FHA 203K loan doesn’t have the same limits as the limited 203K loan, but the process is more detailed.
With the standard rehab loan, you don’t have dollar limits or any limits on the renovations you can do. Room additions, changes to load-bearing walls, and most other renovations are acceptable with this program.
So what’s different?
Besides the dollar amount and allowed work, the standard 203K is a more detailed process. You’ll be assigned a loan consultant who is your go-to person when dealing with the contractors and the financing. Things can get confusing, including when disbursements go out and when work is approved, but the consultant is with you every step of the way.
Since there really isn’t a limit to the renovations you can do with a standard 203K loan, here is what you can’t do with it:
- Adding any luxury amenities
- Minor landscaping projects
- Any renovations that can’t be completed within 6 months
Basically, any structural changes, room additions, or even moving the home to a different site can be financed, as can major landscaping projects, converting a home to a multi-family unit, or completing renovating the entire home as long as the scope of the project can be completed within 6 months.
