Understanding an FHA Streamlined 203k Loan

This article will help explain what an FHA streamlined 203k loan is, what it is used for, and the requirements that go along with one once you are approved for it.  If you have not done so already please read our article entitled “FHA Mortgage Guide” under the mortgage info tab on our website first so that you can be sure you understand what an FHA loan is. 

What is an FHA streamlined 203k loan?

An FHA streamlined 203k loan is a loan designed to be used for repairs and improvements to a home that is added to your mortgage loan.  For example, if you purchase a home for $150,000 and then are approved for an FHA streamlined 203k loan for $20,000 your new total mortgage loan amount is $170,000.  Because both loans are combined you will continue to only have one monthly payment.

Remember, that you must be approved for an FHA mortgage loan to take advantage of an FHA streamlined 203k loan.

It is important to note that this loan is also available when refinancing an FHA loan.

What can this type of loan be used for?

The FHA streamlined 203k loan can be used for any repairs and improvements to a home that are non-structural.  Some examples of what this loan can be used for are:

The repair or replacement of roofs, gutters, downspouts, exterior siding, septic system, windows, doors, and flooring 

The repair, replacement, or upgrade of the HVAC systems, plumbing, and electrical systems 

Minor remodeling that does not involve structural repairs such as to the kitchen or bathrooms 

The painting of both the interior and exterior

Weatherization including replacing or adding storm windows and doors, insulation, and weather stripping

The purchase of any new appliances including the installation of the appliances

Improvements for persons with disabilities

The stabilization or abatement of lead-based paint

The repair, replacement, or addition of exterior decks, patios, or porches

The finishing, remodeling, and waterproofing of the basement sans structural repairs

Are there minimum and maximum amounts allowed?

The minimum FHA streamlined 203k loan amount is $5,000 and the maximum is $35,000.  If the repairs exceed $15,000 an inspection must be performed to determine that all listed repairs and/or improvements were completed.

How does this affect the house appraisal?

When looking to get approved for an FHA streamlines 203k loan a description of the proposed repairs and/or improvements must be included in the appraiser’s report along with the contractor’s cost estimates.  This is so that the appraiser can give an appraised amount of the property as is and an estimated appraised amount of what the house will be worth once the repairs and/or improvements are completed.

What is required in regards to the contractor bids for the lending company?

While it is up to the buyers to pick the contractors they wish to use it is the responsibility of the lending company to examine all the contractor bids and ensure they are within the usual range for similar work.  It is also their responsibility to be sure the contractors have all the proper licenses and meet the bonding requirements.  The lending company, at their own discretion, can provide up to 50 percent of the estimated cost of work prior to the work being started.  Remember, that for repairs and/or improvements exceeding $15,000 the lending company must complete or hire a third party to complete an inspection of the work.

What does the borrower need to keep in mind when selecting a contractor?

In order to be approved for the loan the borrower must use one or more contractors to complete the repairs and/or improvements.  The only exception for completing the repairs and/or improvements themselves is if the borrower can prove they have the expertise and experience to complete the work properly.  In other words the borrower would need to be an electrician to complete electrical work or a plumber to complete plumbing work themselves.

It is the borrower’s responsibility to choose the contractor(s).  It is important for the borrower to remember that the lending company has requirements it has to ensure the selected contractor(s) meets so the borrower needs to be sure they do before they submit the contractor(s) list to the lending company.  The borrower will need to be sure the contractor(s) is properly licensed and bonded and that the estimates are within the usual range for similar work.  The borrower will need to submit written cost estimates and references for each repair and/or improvement.  If the borrower is completing the work themselves they will need to provide a written cost estimate for the materials. 

The cost estimates must state the nature and type of repair and/or improvement, the length of time it will take to complete the work, and the cost for completing the work.  This is required even if the borrower is completing the work themselves.  Once the lending company reviews the estimates provided by the borrower the contractor will have to agree in writing to complete the work for the amount of the cost estimate and within the time frame agreed upon.

How does the contractor get paid?

One of the stipulations of an FHA streamlined 203K loan is that no more than two payments can be made to each contractor.  The first payment is to help with material costs and must not exceed 50% of the total estimated costs.  Any permit fees will be reimbursed to the contractor at closing.  The final payment will be paid once all work is completed.  The lending company is required to only issue the payments to the contractor directly.  If the buyer is doing any of the work themselves the lending company will reimburse them directly for the cost of the materials.  The buyer cannot be reimbursed for labor costs.

When the work completed is less than $15,000 and therefore no inspection is required the lending company can accept receipts and the assurance that the buyer is happy with the work and it was completed satisfactorily to know they should pay the contractor.  The lending company will need to sign a statement before paying the final amount to the contractor stating that the work has been completed professionally and satisfactorily.

Is this loan right for me?

Each individual buyer will have to weigh all their options before deciding if this loan would be right for them.  There are great benefits that this loan offers and opens up a wider range of houses that can be considered during the buying process because you will know you will have the money to fix them up.  Your real estate agent can help you decide if this loan is right for you.