FHA Rehab Loan Guide for Beginners

August 22, 2024

Purchasing a home that needs some improvements or renovations can be a smart financial move, and FHA Rehab loans can help whether you’re buying a fixer-upper home or renovating the property you currently live in.

What Are FHA Rehab Loans?

FHA Rehab loans, also known as 203(k) Rehabilitation loans, are government-backed mortgages that combine the cost of purchasing a home and the expenses for renovations into a single loan.

This program is designed to help borrowers purchase houses that might not qualify for conventional financing due to their condition.

Types of FHA Rehab Loans

The FHA offers two main types of Rehab loans. One type is good for big projects, the other is better for more minor needs that don't require work on load-bearing walls.

Standard 203(k)
This option is for major rehabilitation projects, typically involving structural repairs, additions, or extensive remodeling. The minimum repair cost is $5,000, and a licensed contractor must complete the work. There is no maximum cost.

Limited 203(k)
This streamlined option is for minor repairs and improvements, with a maximum repair cost of $75,000, a big increase from the previous limit of $35K, effective beginning  November 4th, 2024. There is no minimum repair cost for the Limited 203(k).

Benefits of FHA 203(k) Rehab Loans

FHA Rehab loans offer several advantages over conventional financing. They include:

• Lower Down Payment
  You may qualify for a down payment as low as 3.5% of the appraised value after repairs.
• Flexible Credit Requirements
  FHA loans generally have more lenient credit requirements than conventional loans.
• Affordable Interest Rates
  FHA loans often offer competitive interest rates.
• Single Closing
  Streamlines the process with one closing for the purchase and the renovation.
• Energy-Efficient Improvements
  The program encourages energy-efficient upgrades.

To qualify for an FHA Rehab loan, you'll generally need to meet the following criteria:

• Credit Score
  580 or above is the FICO requirement for the lowest downpayment on an FHA 203(k) purchase loan. Lender standards may be higher.
• Property Requirements
  After renovations, the property must meet FHA's minimum property standards. The before-renovation value is not a factor, the after-improvement value is.
• Occupancy
  You must intend to occupy the property as your primary residence. You cannot use these loans to buy investment properties or renovate them.

The FHA Rehab Loan Process Step-By-Step

• Find an FHA-Approved Lender
  Find a lender participating in the FHA 203(k) program.
• Get Pre-Approved
  Obtain a pre-approval letter to understand your budget and strengthen your offer.
• Find a Property
  Locate a property that meets your needs and has the potential for rehabilitation.
• Hire a Consultant (Standard 203(k))
  For Standard 203(k) loans, you'll need to hire an FHA-approved 203(k) consultant to oversee the project.
• Obtain Contractor Bids
  Get bids from licensed contractors for the proposed renovations.
• Submit Loan Application
  Complete the loan application. Submit all necessary documentation to the FHA lender.
• Appraisal and Inspection
  These loans require an appraisal.
• Underwriting and Approval
  The lender will review your application and make a credit decision.
• Closing
  Once approved, you'll attend the closing and sign the loan documents.
• Renovations Begin
  The contractor will start the rehabilitation work according to the approved plans.
• Draw Inspections
  The lender will conduct inspections at various stages to release funds for completed work.
• Final Inspection
  A final inspection will ensure all work is completed satisfactorily.
• Move-In
  You can move into your newly renovated home once the renovations are finished.

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