Full disclosure: I’m about to give you a full and easy to follow explanation of the FHA’s 203K loan process. To keep the lights on at Home Loan Mine, most of the links in the FHA 203K Loan Process in Plain English blog post are affiliate links. If you register with the websites, through my links, websites that I’ve vetted this week, I’ll earn a small commission each time. If I’m lucky, I’ll earn enough money for lights AND a cup of Joe from the Starbucks across the street.
FHA 203K Loan Explained
FHA’s 203K comes in two varieties: standard and streamline.
The streamline limits the repairs funds at $35,000 and does not allow for structural repairs; the standard has no limits (though the mortgage and repair funds cannot exceed the county limits) and it allows structural repairs.
The process for getting them is largely the same, but there are variations.
FHA 203K Definition
A 203K loan is a mortgage and remodeling money in one loan. Let me give you an example to make it crystal clear.
Jane Doe wants to buy a house that needs some work. The sale price and value of the house is $200,000 and the house needs $30,000 in repairs.
With FHA loans people can borrow up to 96.5% of the value of the property. So, in our case, Jane Doe can borrow 200,000×96.5 or $193,000. So far, this is a regular FHA loan.
Here’s the 203K part. Jane Doe can also get $30,000 for the repairs she plans to make and $3,000 contingency reserve. That means she must be able to qualify for $223,000. But if she does, she’s got the money to buy the property and to do the repairs she wants.
Can I Do Repairs Myself With A 203K Loan?
Yes, you can. As long as you can prove that you have expertise and accept that the lender will only fund material costs, not labor.
You must prove you have the expertise to handle every part of the job. If you’re a plumber only, lenders will let you do plumbing but nothing else, no electrical, floors, no installing cabinets or building decks, etc. Just plumbing.
FHA 203K Loan – The Process
There are two 203K loan programs: standard and streamline. The first few steps are the same. I will start with the streamline, as it involves fewer steps.
203K Streamline Process
Step 1. You, the borrower, determine how much money you will need for mortgage loan you need and for the repairs you want to make.
If you’re buying a property, that means you multiply the sale price by 0.965 to determine the mortgage loan you need. It also means you go with a contractor through the house and have them give you a quote for the repairs you want to make.
Step 2. Approach a lender or broker and apply for a mortgage, have them qualify you.
Step 3. Provide the loan originator you’re working with the required documents.
- copy of your ID
- (if legal resident, front and back of your Green Card; if neither a citizen nor a legal alien, copy of the visa / work permit card)
- copy of your pay stubs for the previous 30 days, if a wage-earner
- copies of your W2’s, if a wage-earner
- copies of your federal tax returns for the previous 2 years
- copies of bank statements for the previous 2 months
- copy of the contractor’s bid.
Step 4. Your loan originator pulls your credit, analyzes your income, determines how much you qualify for.
If you qualify for the amount you came up with in step one, great. If you qualify for less, determine which of the items you wanted repaired you can remove from the list, till you qualify.
You can also look for a less expensive contractor.
Step 5. If you qualify and you’re purchasing, your loan originator will provide you and / or your real estate agent with a pre-qual letter.
Step 6. You make an offer on the house. If your offer is accepted, you send the contract to your loan originator.
Step 7. Your loan originator gives you an LE (Loan Estimate) and sends your application to the underwriting department. (We are assuming you like the terms. If you do not like them, you do not sign the intent to proceed form and your application is dead. The loan officer might offer you a better deal or not… )
Step 8. The underwriter reviews everything and issues a conditional approval, that is an approval based on your being able to answer satisfactorily questions and provided additional documents. (It is always conditional even if you’ve provided everything. Because of appraisal and title requirements.)
Step 9. Your loan originator requests the explanations / documents and provides them to the underwriter. That means, your loan originator orders an appraisal, gets a title company to provide the necessary documents, asks you for explanation and documents that you can provide.
Step 10. Your loan originator provides the documents and explanations to the underwriter. If the underwriter is satisfied, your loan is clear to close. If the underwriter is not satisfied, they will request additional explanations and documents, till they are satisfied. (The new documents / explanations can trigger requests for more.)
Step 11. Set the place and time for the closing. You, your attorney, the seller and their attorney, the lender and the title company agree on a day, a time and a place to have the closing.
Step 12. You close. (Between your steps 11 and 12, the lender is going to verify one more time.
(Not all loan originators follow all the steps in the above order. That is to say, some order your appraisal as soon as you’ve signed the intent to proceed, some only once they have a conditional approval, some even later. Some run your application through AUS (Automated Underwriting System) when they qualify you (best pre-qual form), some do it when they’re sending the application to the underwriter. Other variations are possible.
You have 6 months to finish the repairs.
If you request it, you can get up to 50% of the repair money upfront (that is to say, at closing).
Step 13. Your contractor does the remodeling.
Step 14. The lender sends someone (the appraiser usually) to inspect the finished work and take photos. If everything checks out, step 15 happens.
Step 15. The lender sends you a check.
203K Standard Process
Steps 1 through 8 are the same as for the 203k streamline above.
Step 9. in Step 8, the underwriter issued a conditional approval, so in this step, your loan officer contacts an FHA consultant for you, who will inspect the property you are buying and talk to you to determine what work must be done, what work is a good idea to do but is not yet necessary, and what you want to do. Based on that, the consultant provides your loan officer a Specification of Repairs form (SOR).
Step 10. Your loan originator requests the explanations / documents and provides them to the underwriter. That means, your loan originator orders an appraisal, gets a title company to provide the necessary documents, asks you for explanation and documents that you can provide. (Obviously steps 8 and 9 can be reversed, order-wise.)
Step 11. Your loan officer gets the Specification of Repairs form and contractor’s agreement and other paper work signed by all parties.
Step 12. Your loan originator provides your documents and explanations, the contractor and loan consultant’s paperwork to the underwriter. If the underwriter is satisfied, your loan is clear to close. If the underwriter is not satisfied, they will request additional explanations and documents, till they are satisfied. (The new documents / explanations can trigger requests for more.)
Step 13. Set the place and time for the closing. You, your attorney, the seller and their attorney, the lender and the title company agree on a day, a time and a place to have the closing.
Step 14. You close. (Between your steps 11 and 12, the lender is going to verify one more time.
You have 6 months to finish the repairs.
Step 15. This step depends on you and the contractor. With the 203K Standard, repairs monies are disbursed in installments, called draws. The smart thing here, if you ask me, is to have the contractor request a draw for materials. (Most lenders will disburse half of the material costs upfront, as long as no work was done (i.e., as long as the materials draw is the first draw requested.) Some people don’t have this step (some because they have enough funds to pay the contractor to get going or because they do not know about it).
Step 16. The contractor does a part of the repairs agreed upon. When those are done (or partially done, but enough to warrant a draw), step 17 occurs.
Step 13. Your contractor requests a draw.
Step 14. The FHA consultant is asked to go inspect the work. They will write up an inspection report, have the contractor and you, the borrower, sign, then provide it to the lender. The report will state what was completed and how much money should be disbursed. (10% of that amount will be held back – contingency.)
Step 15. If the lender is satisfied, the lender sends the contractor a check. (The lender may request some additional information or more photos, which the consultant will provide.)
Step 16. The contractor does more repairs.
Step 17. The contractor requests a draw.
Step 18. The consultant inspects the work done, writes up a report, sends it to all parties to sign, then sends it to the lender.
Step 19. The lender sends the contractor a check.
Steps 16 through 19 can be repeated, till the maximum allowed draws is reached.
FHA 203K Loan Process Done
Now you know all you need to know about getting a 203K loan.
If you have questions about 203K loans, or any mortgage loans, let me know in the comment section below.
About The Author
Dusan Varga has been in the mortgage industry for over a decade. He owned a real estate appraising company for a decade and threeor four days. He has, in other words, a lot of mortgage knowledge, in particular, and knowledge around the buying a house with a mortgage.