The Mortgage Process When Remodeling Your Home

Consider an FHA 203(k) Loan to Renovate Your Existing or “New” Home

Unless you’ve built a home to your exact specifications, chances are that either the house you live in now or the one you would like to buy could use a little or maybe a lot of work to become your dream home. You can picture a “perfect” version of the home, but can you afford to make the changes? An FHA 203(k) Loan could be the solution! It’s a specialty product offered by Citywide Home Mortgage, an FHA-approved lender.

Ready to get started on the loan process? Call Quinn Richins, Citywide’s product specialist for FHA 203(k) loans at (801) 747-2470. He can let you know over the phone if a 203(k) Home Improvement Loan is right for you.

Never heard of it? Want to know more before you talk to anyone? Read on!

An FHA 203(k) is a loan insured by the government. It allows you to finance not only the cost of your home but also the cost of its improvements. You can buy (or refinance) a home and fix it up with very little money out-of-pocket. Your major up-front cost is the standard low down payment on an FHA loan. All improvement costs are part of the final loan amount being financed, and they become part of your monthly mortgage payment. It is designed to create opportunities to repair or improve existing homes, and increase the value of your home with a single mortgage that has low, fully amortized rates.

FHA-insured loans offer more flexibility in calculating household income and payment ratios.

They help low-income borrowers get a loan without making large down payments. In order to obtain a loan that is backed by the FHA (Federal Housing Administration), one must go through an FHA-approved lender, such as Citywide Home Mortgage.

There are two types of 203(k) loans available to you: Limited and Standard

The right one for you depends on the extent of the repairs and improvements you want to make, as well as their cost.

This loan allows for improvements that are non-structural in nature, with a total cost of up to $35,000, including fees. It excludes items such as moving load-bearing walls, room additions, repairing structural damage, and landscaping. The improvements cannot keep you from occupying the property for more than 30 days during the rennovation, cannot take longer than six months, cannot require detailed architectural drawings, and cannot require more than two disbursements of funds (draws) per contractor to complete the work, one at closing and one after the final inspection.

This loan does allow for structural improvements, like moving load-bearing walls and major landscaping. The cost of all improvements may exceed $35,000. The home can remain unoccupied for up to one year, and the repairs can take up to 12 months. There are a maximum of 5 draws. Because the first draw can’t take place until 10 percent of the work has been completed, there are fees you will have to pay up-front. The next three draws occur at pre-defined times, and the last draw occurs after the final inspection. HUD requires you to use a HUD-Approved 203(k) Consultant, typically a certified contractor or inspector who manages the entire process. You will pay the consultant fee up-front, based on the final cost of the repairs. You can locate a HUD-Approved 203(k) Consultant in your area by visiting html/f17cnsltdata.cfm.

There is actually a long list of things you can do with both types of 203(k) loans. All of these can be included in your “dream home” list:

  • Repair/replace roof, gutters, and downspouts
  • Repair/replace/upgrade existing HVAC systems
  • Repair/replace/plumbing and electrical systems
  • Minor renovations in kitchen and bathroom
  • Interior or exterior painting
  • Weatherization including storm doors and insulation
  • Buy and install appliances
  • Repair/replace septic systems
  • Disability access
  • Abatement/stabilization of lead-based paint hazards
  • Repair/replace/build decks, porches and patios
  • Basement finishing and waterproofing (excluding structural)
  • Replace windows, doors and siding

What you choose to do is really up to you. Only “luxury” items, like above-ground pools, hot tubs and top-of-the-line appliances, are excluded from both loan types.

  • Load bearing walls
  • Room additions
  • Repair/replace sill plate
  • Major landscaping
  • Down Payment of at least 3.5 percent of your own funds
  • Credit Score minimum of 620
  • Debt-to-Income Ratio (DTI) cannot exceed 45 percent of your gross income
  • Loan amount cannot exceed 110 percent of the after-improved value of the home minus your down payment
  • On a refinance, the total amount being financed cannot exceed 110 of the after-improved value of the home minus 2.25 percent, or the current loan balance plus the cost of repairs. FHA limits the total loan amount by county. Find your limit at
  • Only primary residences are eligible, not investment properties.
  • Size is limited to one-to-four-unit dwellings
  • HUD requires a Contingency reserve between 10-20 percent of the total repair costs to be held in escrow to cover overages and ensure that the work is completed on time. Any money left over can go to the balance of your loan or to fund additional improvements.

A 203(k) loan requires a considerable amount of paperwork. You and your loan expert will work together to get the paperwork finished and submitted in a timely manner. It’s important that you have an understanding of what’s required, so ask all the questions you need to ask to get the job done correctly.

In addition to your loan expert, the following people will be part of your team.

  • The Home Power Team is responsible for finding, negotiating and performing the due diligence on the home. It includes the realtor and any inspectors you use during your purchase process.
  • The Loan Power Team is responsible for qualifying you, “originating” the loan on the home, and handling the loan paperwork and money. It includes a mortgage professional, an appraiser and an escrow officer.
  • The Improvement Power Team is responsible for the actual improvement work on the home. It includes your 203(k) consultant, who puts together the Specification of Repairs with the contractor(s) and sub-contractors who specialize in certain tasks.

The timeline of events for a 203(k) home improvement loan will include a few more steps than a loan that doesn’t include financing of improvements. Ask your loan expert for additional details:

  1. Pre-Qualification
  2. Finding a house (home search, offer & negotiation)
  3. Deciding on repairs/improvements
  4. Home inspections
  5. Loan paperwork
  6. Appraisals
  7. Loan approval
  8. Meeting at the title company to sign the paperwork
  9. Home improvements overseen by the Consultant or General Contractor
  10. Final inspections and closing

The main benefit of a 203(k) loan is that it gives you the ability to buy a home in need of repairs or to make changes to your existing home that you might not otherwise be able to afford.

If you are interested in more information on a 203(k) home loan, contact Quinn Richins, Marketing Director/Senior Loan Officer (NMLS# 103926), our Citywide Mortgage loan specialist for FHA 203(k) ) loans, at (801) 747-2470. He can let you know over the phone if a 203(k) Home Improvement Loan is right for you and answer any additional questions you might have.

Additional Resources:

Back to Articles