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The Standard (k) and the Streamlined (k) products allow borrowers to finance the purchase price of the property, closing costs, and repair costs. Another attractive feature of these 203(k) products is that they require only a 3.5 percent down payment on the gross loan amounts. In the private market, conventional rehabilitation mortgages typically require 10 to 20 percent down payment.
Standard (k)
The Standard (k) loan is used when borrowers desire extensive structural work, such as additional room or removal of interior or external walls or when repair costs exceed $35,000. A minimum of $5,000 must be used toward repairs for Standard (k) loans and there is no maximum repair amount. The maximum mortgage, depending on house location, can range from $271,050 to $729,750 (for a more detailed explanation of the mortgage limits, see Appendix C). Further, the loan must not exceed 110 percent of the “as-improved” value. On Standard (k) loans, up to six months of mortgage payments can be financed while the home is renovated and uninhabitable. The six months of mortgage payments help a borrower pay for housing elsewhere during the rehabilitation phase. For Standard (k) loans, the FHA requires that an FHA-designated consultant write up a rehabilitation work plan before approving FHA insurance. The consultant ensures that properties meet FHA building and local code requirements. See table below for a list of subprograms.
Streamlined (k)
The Streamlined (k) product places fewer demands on the borrower and is designed to assist potential homeowners with less complicated and lower-cost rehabilitation projects. Streamlined (k) loans are recommended for small projects that are mainly cosmetic in nature and do not require structural changes to the house. The maximum repair portion of the loan amount is $35,000, and there is no minimum. Cosmetic improvements may include replacing appliances, flooring, windows, and doors. Borrowers can use this type of loan to replace the heating, ventilation, and air conditioning system, paint the home, or make minor roof repairs. Borrowers using this product are not required to employ an FHA-designated consultant. See the table for a list of subprograms.
| Programs | Maximum | Percent of Insured | Use of Proceeds | Down Payment | Maturity | Maximum Interest Rates | Eligible Property |
| Standard (k) |
Determined by the FHA based on geography,a not to exceed $729,750; includes home purchase price, rehabilitation costs, and related finance fees Minimum $5,000 for repairs |
100% of outstanding loan balance | Acquisition of property and substantial expansion or renovation | 3.5% | 15-year and 30-year fixed or adjustable rates | No maximum rates set by the FHA; market determines price | 1-4 unit family properties only, which are owner occupied |
| Streamlined (k) |
Determined by the FHA, based on geography, not to exceed $729,750; includes up to $35,000 for repairs and related finance fees Maximum of $35,000 for repairs |
100% of outstanding loan balance | Acquisition of property and cosmetic or minor improvements | 3.5% | 15-year and 30-year fixed or adjustable rates | No maximum rates set by the FHA; market determines price | 1-4 unit family properties only, which are owner occupied |
Eligible Borrowers
Borrowers who meet the underwriting qualifications for the 203(b) FHA mortgage insurance program are eligible to receive 203(k) loans. These borrowers must occupy the home financed under this program. Profit-motivated investors are ineligible for 203(k) loans. Certain nonprofits and government agencies are eligible borrowers. The FHA must approve, through its Homeownership Centers, nonprofits and government agencies before they can receive 203(k) loans. This provides an opportunity for nonprofits to access financing to restore foreclosed properties. Nonprofits can use the program to rehabilitate foreclosed FHA-owned, city-owned, and OREO properties. However, there are restrictions for nonprofit developers and government agencies. These entities may not have more than 10 incomplete 203(k) properties at any one time. Also, the down payment required is higher. A 3.5 percent down payment is required for individuals, but nonprofits and public agencies must put down 5 percent.
Eligible Properties
To qualify for the program, properties must be one- to four-family dwellings that have been completed for at least one year. The program can be used to convert a single-family unit into a two-, three-, or four-family dwelling or convert a multidwelling building into a single-family home, as long as the borrower intends to be an owner-occupant. Any newly constructed units must be attached to the existing dwellings. Demolished homes are eligible as long as part of the existing foundation remains intact. The number of units must comply with local zoning. Mixed-use properties qualify as long as no greater than 25 percent (for a one-story unit); 33 percent (for a two-story building); or 49 percent (for a three-story building) of floor space is designated for commercial use. For these properties, rehabilitation funds must be used exclusively for the residential portion of the unit or for accessing the residential space. Cooperative units are ineligible, but condominium units, with some restrictions, qualify.
Eligible Uses
There are several eligible uses for 203(k) loans. Some typical uses include room additions, deck installation, or replacing the heating and air conditioning systems. Certain repairs must be completed before other cosmetic improvements can occur. However, the cosmetic improvements may be added after the $5,000 threshold has been exceeded. In addition, the program attempts to promote energy conservation and renewable energy upgrades. Cost-efficient energy conservation is stressed; weather stripping and ensuring the integrity of the building's envelope, through sealing and caulking cracks and joints, is mandated.
| Standard (k) | Streamlined (k) |
| Additional rooms | Minor roofs, gutters, and downspouts repair |
| Well or septic system | Interior or external painting |
| Replacement of all plumbing | Minor plumbing and electrical work |
| Major chimney repairs | New flooring (carpet, wood, tile) |
| Major roof, kitchen, and bath work | Minor kitchen and bath remodeling |
Preliminary Steps for Borrowers
Several steps and procedures need to be followed to complete a successful 203(k)-financed home rehabilitation projects. Borrowers, most likely working with real estate agents, will locate properties to purchase and rehabilitate as well as find FHA-approved lenders. The FHA offers a Web-based search tool to help borrowers find FHA-approved lenders in their areas.
FHA Designation for Lenders
Lenders must be FHA-approved to offer any FHA products, including 203(k) loans. A bank applies directly to the FHA to receive authorization to make 203(k) loans. Once the bank's application is received, it typically takes the FHA between 30 and 45 days to process the application and make the final decision to approve the bank loan. Lenders pay a $1,000 FHA-designation application fee.
Consultants and Appraisers
Before loan closing, the borrower, or a 203(k) FHA-approved consultant mandated under the Standard (k) program is required to write up an in-depth construction plan, with architectural exhibits and an accurate cost assessment. Once the write-up is complete, an FHA-approved appraiser must determine the estimated value of the property after work is completed. While taking into account the FHA loan limits, the lender uses the appraisal, along with the original loan application documents, to determine the maximum insurable mortgage amount. Based on this evaluation, the lender issues a commitment letter to the borrower and prepares for the closing date.
Underwriting
The FHA relies on an automated underwriting TOTAL Mortgage Scorecard and FHA-approved Direct Endorsement (DE) underwriters to make credit decisions concerning 203(k) loans. Lenders must submit information about the borrower, loan, and property via an automated online underwriting system. The automated system performs an initial determination as to whether the borrower has the ability to repay the loan. Applications not initially qualified through the automated system are referred to the FHA's cadre of DE underwriters who manually review the application to determine credit risk. Regardless of the risk assessment approach used, the originator remains responsible for compliance with FHA eligibility requirements, as well as for any credit, capacity, and documentation requirements.
Closing 203(k) Loans
Closing an FHA 203(k) loan is similar to any typical FHA loan closing except for the Rehabilitation Loan Agreement and the establishment of a Rehabilitation Escrow Account. The Rehabilitation Loan Agreement between the borrower and the lender establishes the conditions under which the lender releases the rehabilitation funds. The borrower is required to make mortgage payments to the lender based on the entire outstanding principal amount, including the escrow account balance that has not yet been disbursed. However, under the Standard (k), a borrower may include up to six months of mortgage payments in the rehabilitation budget to cover these payments during the rehabilitation period while the property is uninhabitable. After the closing, the bank submits copies of the mortgage documents to the FHA, and FHA mortgage insurance becomes effective immediately upon endorsement. Lenders submit their documentation materials through FHA's online servicing system, known as FHA Connection.
Construction Phase
The FHA requires that borrowers complete the rehabilitation in six months. Some lenders may establish a shorter construction period depending on the amount of work needed. As construction progresses, the bank disburses funds from the Rehabilitation Escrow Account after the completed work has been reviewed by an FHA-approved inspector. A 10 percent holdback is placed on construction phases until all outstanding contracts are complete. The FHA allows for four draws, plus a final inspection, from the Rehabilitation Escrow Account during the construction phase.
Final Inspection When repairs are finished, the borrower requests a final inspection. Upon final inspection, all the funds from the Rehabilitation Escrow Account, including the required 10 percent holdback, are released. If there is money left in the escrow account, the borrower may apply the funds to pay down the mortgage principal or, alternatively, the funds may be used for additional improvements not included in the initial plans. See Figure 2 for a flow chart of a Standard (k) loan.
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