Phoenix FHA 203k Loan

Paul Welden PLLC, RealtorPAUL WELDEN, PLLC
Exclusive Buyer’s Agent
Phoenix, Arizona Real Estate
Direct: 480-241-0081

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 home buyers to finance repair/improvement money into their mortgage to repair, improve or upgrade their home. With this loan option, home buyers 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 home buyer 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 FHA maximum loan amount) & the Streamline ($0 – $35,000…up to FHA maximum loan amount). The FHA 203k Rehab loan is more like a construction project, and the FHA Streamline 203k Loan is for more minor improvements. CLICK HERE for the FHA maximum mortgage amounts for your area.

An oversimplified example: Purchase price is $100,000. Upgrades/Repairs/Improvements will cost $15,000. Borrowers loan amount is $115,000 (not to exceed FHA maximum mortgage amount).

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 amounts for your area. Or you may contact your FHA lender for this information.

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 Rehab does allow for structural modifications, landscaping and for work in excess of $35,000. Luxury items such as swimming pools, BBQ’s, Gazebos, spas, etc. are not allowed for any 203k loan. However, limited pool repair (max $1500-subject to lender approval) is allowed under both versions of the FHA 203k loan. 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 and Bathroom 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
  • Mold remediation
  • Landscaping
  • Fencing & Masonry
  • Garages
  • Limited swimming pool repair
  • Whole house remodeling
  • 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
  • Structural repairs/modifications (moving walls, repairing foundations, building additions, etc.)

(The above list is NOT an all-inclusive list)

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 preset 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 on the FHA 203k Loan?
According to HUD, for the Standard/Rehab/Full 203k 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 203k 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 on the FHA 203k Loan?
A contingency reserve is 10%-20% of the repair/renovation amount and its purpose is in case of any potential cost overruns or unexpected expenses. A contingency reserve is usually required for the FHA 203k Standard/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-approved 203k Consultant?
For the FHA 203k Standard/Rehab, a HUD-approved 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 recommended the use of a 203k Consultant for all 203k loans, because they can add an extra layer of protection and information that only they can provide. CLICK HERE for a list of all 203k Consultants in your area.

Can I do the work myself on an FHA 203k Loan?
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 General Contractor, 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 usually 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. Because of lender overlays (internal additional rules and guidelines), a contractor will be required to perform the work the majority of the time.

What is a Certified 203k contractor?
Because neither HUD nor FHA certifies, approves or endorses contractors for the FHA 203k loan program, there is no such thing as remodeling/general contractor being an FHA approved contractor for the FHA 203k loan. Instead, HUD/FHA allow the borrower to hire whomever they want (no conflict of interest present) and require the lender to determine that the selected contractor is acceptable for 203k work by verifying their license, insurance, references, experience, education and understanding of the 203k. Since lenders do not provide a comprehensive education program for contractors on the 203k, contractors complete the 203k Contractor Certification Program to receive their 203k education. Earning the designation as a Certified 203k Contractor is a validation that contractors present to consumers, lenders and Realtors® of their competency, understanding and awareness of the 203k [HUD’s guidelines, time lines, paperwork, compensation structure, etc.. as well as the contractor’s ability to afford the start-up costs of each 203k project]. The 203k Contractor Certification Program is a 203k-education based approval process where learn the FHA 203k program through education and testing and their business, customer and financial references have been contacted and verified, as well as verification of licensing and insurance. This education-based approval process assures FHA lenders, Realtors® and borrowers that these Certified 203k Contractors have been properly educated on the 203k loan program. All Certified 203k Contractors will be listed in the 203k Contractor Directory, should display the Certified 203k Contractor logo on their Websites and can provide you with a copy of their Certificate of Approval. Go to the 203k Contractor Directory to use the map or the Contractor Search page to manually search for all the Certified 203k Contractors.

How does a contractor get involved with the FHA 203k loan program?
There are 5 items regarding a contractor’s participation with the FHA 203k:

  1. The consumer/borrower is responsible for approving, selecting and hiring whichever contractor s/he wants
  2. There cannot be ANY conflict of interest between the consumer/borrower and the contractor — no family relationship and no financial relationship
  3. HUD/FHA do not approve, endorse or certify remodeling/general contractors or builders. In 1995, HUD eliminated the database of HUD approved builders/contractors. Since 1995, there has been no such thing as a HUD/FHA approved builder/contractor.
  4. The lender does not approve contractors (see item #1). However, the lender is responsible for determining that the selected contractor is acceptable to do the 203k project in a timely and workmanlike manner and in accordance with HUD’s guidelines by verifying the contractors license, insurance, references, credentials, work experience, as well as the contractor’s understanding of and competency with the 203k.
  5. Contractors need to be as knowledgeable as possible regarding the 203k (HUD’s guidelines, time lines, paperwork, processes, compensation, etc.) The 203k Contractor Certification program, which includes the 203k Contractor Education course, is how contractors can receive their 203k education. Earning the designation as a Certified 203k Contractor is the validation that contractors present to consumers, lenders and Realtors® of their competency, understanding and awareness of the 203k [HUD’s guidelines, time lines, paperwork, compensation structure, etc.. as well as the contractor’s ability to afford the start-up costs of each 203k project].

If I am a contractor, how can I earn the designation as a Certified 203k Contractor?
Proceed to the Certification page of the 203k Contractor Directory to learn about the process and submit your online application.

How do the contractors get paid on an FHA 203k Loan?
The contractors get paid in a series of draws by the borrower’s lender through escrowed funds. At closing, the lender places the rehab/improvement funds into an escrow account.

  • For the FHA 203k Streamline, after closing on the 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 submitted to and approved by the borrower and the lender.
  • For the FHA 203k Standard/Rehab, after closing on the home, there is no upfront money paid to contractors to offset the start-up costs. So, contractors must have ample credit with suppliers and/or sufficient capital/reserves to afford the start-up costs. Contractors receive payment after stages of work are completed and receive by 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 Standard, an inspection is required.

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 possible 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%-1/4% more than traditional FHA loans) and
  • a 10%-20% contingency reserve (usually only for the Standard 203k version) based on the repair/improvement amount to cover any potential unexpected expenses or unknown conditions (added into the loan amount).

Can an investor use the FHA 203k Loan?
No. The borrower must be a primary residence owner occupant or a qualified nonprofit group. Since 1996, there has been a moratorium on investors using the FHA 203k loan. However, the Investor 203k is expected to be reintroduced in 2013.

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 required order of items that must be completed. However, to ensure a smooth 203k process, these are the HUD recommended steps to purchase a home using the FHA 203k loan:

  1. Borrower selects and FHA approved lender with 203k experience and hires a 203k knowledgeable Real Estate agent
  2. Apply for the FHA 203k loan and submit all documentation to verify the application
  3. Borrower locates a property and performs a feasibility analysis (conducted by a HUD approved 203k Consultant) to determine the extent of the rehab work required, a rough cost estimate and an estimate of the market value of the improved property
  4. Sales contract is executed. Contract should state the buyer is seeking an FHA 203k Loan and is “contingent on loan approval and buyer’s acceptance of additional required repairs by HUD/FHA or the lender.”
  5. Then during the inspection period ………………
    • on the Standard 203k, the borrower should
      • obtain a Work Write-up from a HUD approved 203k Consultant showing the scope of work required to be done, including a cost estimate on each repair or improvement of the project
      • obtain a proposal from a Certified 203k Contractor of the work being done in the HUD/FHA required format
      • have the lender order the appraisal to determine the AS-IS and Improved value of the property.
    • on the Streamline 203k, the borrower should
      • have a HUD approved 203k Consultant or FHA approved inspector perform the home inspection and detail all the HUD minimum property requirements or if inspection is already completed by an inspector who is not FHA approved, a 203k consultant should perform a feasibility analysis
      • obtain a proposal from a Certified 203k Contractor of the work being done in the HUD/FHA required format
      • submit the contractor’s proposal to lender
      • have lender order the appraisal
    • on both version, the consultant’s paperwork, the contractor’s proposal and appraisal are submitted to the lender for approval
  6. If the borrower passes the lender’s credit-worthiness test, the loan closes for an amount that will cover the purchase/refinance plus the renovation expense and any contingency reserves, allowable closing costs and mortgage payments (Standard 203k only – up to 6 months)
  7. At closing, the seller is paid off and all remaining funds are placed in an interest bearing escrow account controlled by the lender
  8. You now own the home (Loan is closed and funded) and renovations can begin with your Certified 203k Contractor

Who do I contact for more information on the FHA 203k Loan?
Contact Paul Welden (see below) or go to the 203k Contractor Directory at

Paul Welden PLLC, RealtorPAUL WELDEN, PLLC
Exclusive Buyer’s Agent
Phoenix, Arizona Real Estate
Direct: 480-241-0081

Equal Housing Opportunity REALTOR