203k Loan FAQs

The following is a list of common questions regarding the 203k loan program. The answers listed below are taken from information released by the Federal Housing Authority and are not meant to be a starting source of general information. For answers to questions regarding your unique situation please contact Denver Lending’s offices at 303.945.3962.

Can I refinance my existing mortgage loan into an FHA 203k Loan?

An existing mortgage can be refinanced using both versions of a 203k loan.

Who qualifies for an FHA 203k Loan?

Any owner occupant primary residence borrower or qualified non-profit group who qualifies for an FHA loan can also qualify for an FHA 203k Loan.

Can an investor use the FHA 203k Loan?

No. The borrower must be a primary residence owner occupant or a qualified non-profit group. Since 1996, there has been a moratorium on investors using the FHA 203k loan.

What types of properties qualify for a 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).

Do I need to hire a HUD approved 203k Consultant?

For the Full 203k loan a HUD-approved 203k Consultant is required. The 203k Streamline does not require a 203k consultant.

How are loan funds disbursed for the purchase and renovation?

At closing, funds are disbursed for the home purchase and, based on previously submitted and accepted contractor bids, renovation funds are placed by the lender in an escrow account. These funds are then paid in installments to contractors as the work proceeds with final payments following inspection at completion. The actual disbursement schedule, inspections and paperwork required are determined by the lender for each project in conformance with FHA guidelines

What is a contingency reserve?

A contingency reserve is 10%-20% of the repair/renovation amount. It is used to address any potential cost overruns or unexpected expenses. A contingency reserve is usually required for the FHA 203k Standard/Full but not for the FHA 203k Streamline. Any monies saved or not spent may be used to complete additional work (subject to lender approval) or a one-time principle balance reduction in the mortgage amount.

Does HUD always require a contingency reserve to cover unexpected cost increases?

On properties older than 30 years and over $7,500 in rehabilitation costs, the cost estimate must include a contingency reserve. The reserve must be a minimum of ten (10) percent of the cost of rehabilitation; however, the contingency reserve may not exceed twenty (20) percent where major remodeling is contemplated.

What happens if the cost of the rehabilitation increases during the rehabilitation period?

Contingency reserves are used to address this issue but the overall 203(k) mortgage amount cannot be increased to cover additional expenses exceeding the reserve amount. It is important to carefully select a contractor who will accurately estimate the cost of the improvements and satisfactorily complete the rehabilitation at or below the estimate.

What if there are extra funds after renovation?

Any funds left over after completion of the planned renovation can be used to make additional allowable improvements to the property. Otherwise, those funds will be applied to pay down the principal balance of the mortgage.

Is there a time limit for the renovation?

The renovation must begin within 30 days of the closing of the loan and must be completed within the time frame established in the loan agreement. The total time for renovation must not exceed six months.

What if the home is not habitable during renovation?

The Full 203k loan allows for up to six mortgage payments to be included in the renovation funds to cover the period when the home is uninhabitable during renovation. If the home will not be habitable at any time during the renovation a streamline 203k loan cannot be used.