Alabama | Frequently Asked Questions for the FHA 203k loan program

What is an FHA 203k Loan?
An FHA 203k loan is basically the same as a regular FHA [called a 203(b)], but with a twist. An FHA 203k loan permits homebuyers to finance repair/improvement money into their mortgage to repair, improve or upgrade their home. With this loan option, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser or homebuyer preferences, such as energy efficient improvements, replacement of existing counter tops, appliances, floor coverings, etc. There are two types of FHA 203k Loans: Standard/Rehab (minimum $5,000 up to 110% of the improved appraised value) & the Streamline (work is less than $35,000…up to 110% of the improved appraised value). The FHA 203k Rehab loan is more like a construction loan, and the FHA Streamline 203k Loan is for more simple renovations. If you qualify for an FHA loan, you automatically qualify for an FHA 203k loan.

Example: Purchase price is $100,000. Upgrades/Repairs/Improvements will cost $15,000. Borrowers loan amount is $115,000 (max 110% of after fixup appraised value).

What are the benefits of using an FHA 203k Loan?
The purchase of a house that needs repair is often a catch-22 situation, because the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased. HUD’s FHA 203k loan program can help you with this quagmire and allow you to purchase or refinance a property plus include in the loan, the cost of making the repairs and improvements. Plus the mortgage loan interest on the FHA 203k loan qualifies for the mortgage interest tax deductions like all other mortgage loans. So, the interest that the borrower pays on this “construction” can be all tax deductible! The FHA 203k loan program improves the real estate market because it requires a property to actually be improved….not just purchased. Because of the improvement requirement with the FHA 203k loan program, real estate values are increased, which helps other homeowners in the same neighborhood, invigorates communities, creates work for contractors and commerce is conducted by the purchasing of goods and services. Simply put, the FHA 203k loan program improves everything associated with it.

Who qualifies for an FHA 203k Loan?
Any owner occupant primary residence borrower or qualified nonprofit group who qualifies for an FHA loan can also qualify for an FHA 203k Loan. No investor purchases using the FHA 203k loan have been allowed since 1996.

What type of properties qualify for an FHA 203k Loan?
An FHA 203k Loan can be used for one-to-four unit dwellings, such as Single Family Detached Homes, Duplexes, Triplexes, 4-plexes, Condominiums (certain restrictions apply) and Mixed-Use Residential (certain restrictions apply).

What is the maximum loan amount for an FHA 203k Loan?
It depends on the county where the property is located. CLICK HERE for the FHA maximum mortgage loan amounts for your county in Alabama.

What types of repairs and/or modifications are acceptable for an FHA 203k Loan?
Any repairs/improvements/modifications/modernizations that add value to and/or improve the property are acceptable for an FHA 203k Loan. The improvements must comply with HUD’s Minimum Property Standards (24 CFR 200.926d and/or HUD Handbook 4905.1) and all local codes and ordinances. Structural modifications and any work in excess of $35,000 are NOT allowed for the FHA 203k Streamlined Loan, but the FHA 203k Standard/Full version does allow for structural modifications and for work in excess of $35,000. Luxury items such as outdoor Kitchens/BBQ’s, Gazebos, outdoor spas/jacuzzis, etc. are not allowed for any 203k loan. However, limited pool repair is allowed under both versions of the FHA 203k loan (max $1,500-subject to lender approval).
Examples of allowable repairs/modifications/renovations for the FHA 203k loan (not an all-inclusive list):

Energy Efficient upgrades (windows, insulation, solar systems, etc.)
Repair/Replacement of roofs, gutters and downspouts
Repair/Replacement/upgrade of existing HVAC systems
Repair/Replacement/upgrade of plumbing and electrical systems
Repair/Replacement of flooring
Kitchen remodeling
Painting, both exterior and interior
Weatherization, including storm windows and doors, insulation, weather stripping, etc.
Purchase and installation of appliances, including freestanding ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
Accessibility improvements for persons with disabilities
Lead-based paint stabilization or abatement of lead-based paint hazards
Repair/replace/add exterior decks, patios, porches
Basement finishing and remodeling
Basement waterproofing
Window and door replacements and exterior wall re-siding
Septic system and/or well repair or replacement
Stuctural repairs/modifications (moving walls, repairing foundations, etc.)

Is there a minimum or a maximum repair amount for an FHA 203k Loan?
FHA 203k Streamline: no minimum - $35,000 maximum*
FHA 203k Standard/Full: $5,000 minimum - no pre-set maximum*
*The maximum is always limited by lesser of the borrowers approval limit, the FHA maximum mortgage limit for the area or 110% of the improved appraised value.

Will my mortgage lender inspect the repairs/improvements?
According to HUD, for the Standard/Full version, all work must be inspected by the 203k Consultant or the FHA appraiser prior the contractor receiving each draw/payment. According to HUD, on the Streamline version, for repairs in excess of $15,000, the Lender must perform or obtain an inspection of the completed work by a third party. For repair costs not exceeding $15,000, the Lender is not required to perform, or have others perform, inspections of the completed work. However, the Lender may choose to obtain or perform inspections if it believes such actions are necessary for program compliance and/or risk mitigation. Lenders may also ensure that the repairs and/or improvements have been completed by obtaining contractor’s receipts or by a signed Mortgagor’s Letter of Completion. If the Lender determines that an inspection(s) by a third party is necessary to ensure proper completion of the proposed repair or improvement item, the Lender may charge the borrower for the costs of no more than two inspections per each contractor. To eliminate the need and cost for an inspection of the completed repair(s) or improvement(s) when not exceeding $15,000, the Lender may accept receipts or proof of completion of the work to the homeowner’s satisfaction from the contractor. Before a final release is made, the home owner must sign a statement acknowledging that the work has been completed in a professional and satisfactory manner.

What is a contingency reserve?
A contingency reserve is usually 10%-20% of the repair/renovation amount and its purpose is incase of any potential cost overruns. A minimum of a 10% contingency reserve (maximum not to exceed 20%) is required for the FHA 203k Rehab but none is required for the FHA 203k Streamline. Any monies saved or not spent may be used to complete additional work (subject to lender approval) or a onetime principle balance reduction in the mortgage amount.

Do I need to hire a HUD-Certified 203k Consultant?
For the FHA 203k Rehab, a HUD-Certified 203k Consultant is required, but is NOT required for an FHA 203k Streamline. However, you are allowed to hire anybody you think will help you to make good real estate decisions. Even if a HUD 203k Consultant is NOT required, you lender may require one. Just because HUD doesn’t require the use of a 203k Consultant, doesn’t mean that the lender making the loan won’t require one. Always check with the lender first. We always recommend the use of a 203k Consultant for all 203k loans, because they can add an extra layer of protection, guidance and information that only they can provide. CLICK HERE to find all of the 203k Consultants in Alabama.

Can I do the work myself?
YES, subject to your lender’s approval. However, if the borrower wants to do any work or be the general contractor, they must be qualified to do the work, and do it in a timely and workmanlike manner. This means that if you want to do the work yourself or be your own GC, then you MUST be skilled and licensed to do such work. It is very important that the work be done in a time frame that will assure the completion of the work that will be agreed upon in the Renovation Loan Agreement (signed at closing). A borrower doing their own work can only be paid for the cost of the materials…never the labor. Contractor estimates are still required and the loan amount is usually based on those estimates. Monies saved or not spent can be allocated to cost overruns, additional improvements, or a onetime principle balance reduction.

What is a Certified 203k Contractor?
Because neither HUD nor FHA certifies, approves or endorses contractors for the 203k loan program, there is no such thing as an FHA approved contractor for the FHA 203k loan. Instead, HUD/FHA allow the borrower to hire whomever they want and require the lender to determine which contractors are acceptable for 203k work by verifying their license, insurance, references, experience, educaton and understanding of the 203k. Since lenders do not educate contractors on the 203k, contractors complete the 203k Contractor Educaton course to become Certified 203k Contractors. The 203k Contractor Certification Program is partly education and partly an approval process where their knowledge of the FHA 203k program is verified and tested and business and customer references have been contacted and verified, as well as verification of licensing and insurance. This education-based approval process assures FHA lenders, Realtors® and consumers that these Certified 203k Contractors have been properly educated on the 203k loan program, which is why lenders use this directory as their 203k Education source. All Certified 203k Contractors listed in this directory should display the Certified 203k Contractor logo on their Websites and can provide you with a copy of their Certificate of Approval.

If I am a contractor, how can I to get approved to be on this directory?
Complete the online application on the CERTIFICATION page of the nationwide 203k contractor directory.

How do the contractors get paid?
The contractors get paid in a series of draws by the borrower’s lender through escrowed funds. At closing, the lender places the repair/improvement funds into an escrow account. For the FHA 203k Streamline, after closing on your home, contractors may receive up to 50% of the job cost as a pre-construction payment, subject to lender approval. Once all the work is complete on the Streamline version, the contractors can request final payment of the remaining portion of the job cost according to the proposal that was submitting to the borrower and the lender. For the FHA 203k Rehab, contractors receive a default 4 draws plus a final for payment. More draws can be authorized by approval from the consumer and lender. For each draw request on the 203k Rehab, an inspection is required. If more than one tradeline is used, it is recommended that you hire an approved general contractor to coordinate all the work.

What costs/fees are involved with an FHA 203k Loan?
The borrower will incur the fees normally associated with an FHA loan (contact your lender and/or real estate agent for more detailed information). In addition, other costs may include:

a 2nd appraisal fee…usually not needed (paid at time of service),
fees charged by contractors and consultants (estimates, inspections and re-inspections, etc.),
slightly higher interest rate (typically 1/8%-1/2% more than traditional FHA loans) and
a 10%-20% contingency reserve (usually only for the Rehab version) based on the repair/improvement amount to cover any potential overages (added into the loan amount).

Can an investor use the FHA 203k Loan?
No. Since 1996, HUD has placed a moratorium on investors using the FHA 203k loan program. Currently, the borrower must be a primary residence owner occupant or a qualified non-profit group.

Can I refinance my existing mortgage loan into an FHA 203k Loan?
Yes, you can refinance your existing mortgage into an FHA 203k loan. The FHA 203k Streamlined loan is also available for mortgage refinance transactions including those where the property is owned free-and clear. Only credit-qualifying “no cash out” refinance transactions with an appraisal are eligible for the FHA 203k Streamlined Loan. If the borrower has owned the property for less than a year, the acquisition cost must be used to determine the maximum mortgage amount. The requirement to use the lowest sales price within the last year does not apply to the FHA 203k Streamlined Loan.

What are the recommended steps to purchase a property using the FHA 203k Loan?
There are NO required steps or any specific order that items must be completed. However, to ensure a smooth real estate purchase, these are the recommended steps to purchase a home using an FHA 203k loan:

The Homebuyer selects an FHA-approved 203k lender and real estate agent knowledgeable with the FHA 203k loan.
The Homebuyer locates a home and executes a sales contract after doing a feasibility study of the property with their real estate agent. The contract should state that the buyer is seeking an FHA 203k loan and that the “contract is contingent on loan approval based on additional required repairs by HUD, FHA or the lender” or the “contract is contingent upon buyer(s) obtaining an FHA 203k loan without conditions”.
Then, during the inspection period, the Homebuyer has 2 options: 1) have his/her lender order the appraisal immediately after contract acceptance to determine what are the minimum repairs/improvements required to purchase the home and then obtain a loan based on that information (may require a 2nd appraisal) OR 2) get a detailed proposal(s) showing the scope of work to be done, including a detailed cost estimate on each repair or improvement of the project and then have the appraisal performed to determine the after-renovation value of the property. This choice is made by the homebuyer. A HUD Consultant, if required/needed, is also used during this period. The appraisal, contractor’s write up and the HUD Consultants Scope of Repair report are submitted to the lender for approval.
If the borrower passes the lender’s credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs plus any required contingency reserves, any allowable closing costs and mortgage payments (only on 203k Rehab–up to 6 months).
At closing, the seller of the property is paid off and the remaining funds are put in an escrow account to pay for the repairs/improvements and any allowable closing costs and/or mortgage payments during the rehabilitation period.
You now own the home and can begin the renovations.
Escrowed funds are released to the contractor(s) during construction through a series of draw requests for completed work. To ensure completion of the job, 10% of each draw is usually held back; this money is paid to the contractors after the lender determines there are no liens on the property.
For the Streamline – The work must start within 30 days after closing/funding, property needs to be livable within 30 days after closing, work may not cease for more than 30 consecutive days, the owner/borrower may not be displaced from the property for more than 30 days, and all work must be completed within 6 months after closing. For the Rehab – The work must start within 30 days after closing/funding, the owner/borrower is permitted to be displaced from their home for more than 30 days, work may not cease for more than 30 consecutive days, and all the work needs to be completed within 6 months.

Where is the FHA 203k loan available?
An FHA 203k loan is available in all 50 US States. This site is for the 203k Contractors in Alabama for the FHA 203k loan program. Click Here for the nationwide 203k contractor directory located at 203kContractors.com® to locate a 203k contractor in following states:

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

Washington DC

West Virginia

Wisconsin

Wyoming

Who do I contact for more information?
Call Toll-free (855) CALL-203K or go to the Contact page to submit a question form

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