Answered: Your biggest questions about Fha 203(k) streamline loans

Answered: Your biggest questions about Fha 203(k) streamline loans

If you’re a homeowner who recently bought a fixer-upper or completed a home renovation, you may have heard about FHA 203(k) streamline loans, which are rapidly becoming more popular. Like all federal home mortgage programs, 203(k) loans have lots of unique rules and regulations you should know about as you consider your home renovation financing options.

This guide explains how FHA 203(k) streamline loans work, highlights their pros and cons, and compares them with personal loans for home improvement, a closely related option, to help you determine which one is right for you.

What are FHA 203(k) loans?

FHA 203(k) loans are federally insured loans that simultaneously fund the purchase and repair or renovation of a house. You can also use an FHA 203(k) loan to pay for remodeling projects on a home you already own.

These loans are part of the Department of Housing and Urban Development (HUD) “fixer-upper program,” designed to help keep older homes in good condition and revitalize older neighborhoods.

There are two types of FHA 203(k) loans:

  • The standard option, which funds major renovations and structural repairs over $35,000.
  • The limited, or streamline option, which funds projects up to $35,000–generally minor remodels and home improvement projects.

The streamline loan is the most popular type, because it eliminates some of the paperwork and simplifies the process for funding renovation projects compared to the standard option.

With FHA 203(k) streamline loans, you can borrow the full purchase price of the house plus up to $35,000 for repairs and renovations. The interest rates typically run about 0.75% to 1.00% above standard FHA loans—but standard FHA rates are generally lower than conventional mortgage loans, so 203(k) interest rates are still competitive.

Perhaps the most attractive feature, however, is that FHA allows lower credit scores than would otherwise qualify with a conventional construction loan—as low as 580 in some cases, although many lenders may require scores in the 640 range.

To be clear, HUD and the FHA do not make loans to consumers; private lenders actually lend you the money. The loans are simply insured by the federal government, which means that the lender is protected against financial loss if the borrower defaults on the loan. Many lenders are hesitant to offer rehab and repair loans on “fixer-uppers;” the federal insurance incentivizes lenders to give you a loan you might not otherwise qualify for.

How do FHA 203(k) streamline loans work?

An FHA 203(k) loan replaces your existing mortgage and rolls it into a new loan that finances what you owe on your home plus the cost of the renovations and repairs you want to complete. You are essentially refinancing your existing mortgage—or taking out a new one if you don’t have a mortgage on your home.

Because it is a federally insured loan, there is an extensive application and appraisal process, and if you don’t have enough equity in your home to cover the down payment (typically 3.5% of the total loan amount), you may have to come up with cash to close your loan. It typically takes between 45 and 60 days to close a 203(k) streamline loan.

FHA 203(k) streamline loans can be used to pay for a wide range of non-structural repairs and improvements, including:

  • Plumbing, electrical, heating, and HVAC work.
  • Roofing.
  • Minor kitchen and bath remodels.
  • Interior and exterior painting.
  • Energy efficient improvements (weatherstripping, insulation, upgraded appliances, new windows and doors).
  • Flooring.
  • Decks, porches, finished basements.

The loans cannot be used for landscaping, room additions, and major remodels that involve moving a load-bearing wall or other structural changes. They also cannot be used for luxury upgrades such as hot tubs and swimming pools. You can only use these loans if you are the owner-occupant of the home; you can’t use them to rehab a rental property.

Only certain types of homes qualify for the FHA 203(k) loan program—certain condos, new construction or unfinished homes, some multi-family units, and co-ops are generally excluded.

Once the loan is approved, you will need to use contractors approved by your lender. Although it is technically possible to do some of the work yourself, in most cases, lenders will not approve a DIY project under the FHA 203(k) loan program.

What are the pros and cons of an FHA 203(k) streamline loan?

These loans can be the perfect solution if you want to purchase a fixer-upper but don’t have the money to do the required work to make it livable. They are also a good choice if you plan to live in the home for several years; the high upfront costs make it difficult to recoup your expenses if you plan to move within a year or two.

A few advantages of FHA 203(k) streamline loans include:

  • You end up with one mortgage and one monthly payment as opposed to two separate loans.
  • Interest rates are usually lower than personal home improvement loans.
  • Longer loan terms (usually 30 years) mean your monthly payments are lower.
  • In some cases, the credit requirements may be less stringent than with other types of home improvement loans.
  • Streamline loans are usually easier to get than the standard 203(k) loans and don’t require a complex process of bids, proposals, and inspections.

But there are a lot of drawbacks to consider with these loans, including:

  • You will pay a lump sum at loan origination for your mortgage insurance through FHA, plus a monthly mortgage insurance premium (MIP) for the life of your loan.
  • Relatively few lenders make 203k loans; you may not be able to work with the lender you prefer.
  • There is an extensive and costly application process, and a significant paperwork burden during the renovation period. Some contractors won’t work on these projects because of the extra paperwork requirements, which means the contractor you already have a good relationship with might not be the one who completes the work—and you may be unable to lock in the contractor you want because the application process takes so long.
  • Work must be completed within six months and many lenders require a HUD-approved “construction manager” who oversees the project from beginning to end. If your lender requires it, you will be charged a fee for this service, usually between $600 and $1,000, which is rolled into your loan amount.
  • Some lenders require a “contingency fund,” usually 10% to 20% of the cost of the planned repairs and renovations, which acts as a piggy bank to pay for unexpected costs and overages while the work is being done. If your lender requires a contingency fund, the amount goes toward the $35,000 loan amount cap. In practical terms, that means you may only get to use $28,000 of your $35,000 loan for repairs and renovations. If the contingency fund isn’t used, your lender usually applies it as a one-time principal reduction payment to your loan balance.
  • All work must be up to health and safety standards, which means that you may end up with unexpected costs and additional work if, for example, a problem with the electrical system is discovered. Even though it’s always a good idea to address these issues, you lose the flexibility to handle them on your own and in the timeframe that works best for you.
  • You can only use the funds for approved projects; there isn’t a lot of flexibility to adjust the work or add to the scope of the project agreed on by your lender, except in the case of health or safety issues.
  • The extended time to funding eliminates these loans as a source of cash for urgent repairs. Realistically, you can expect the entire process, from loan application to project completion, to take between 4 and 9 months.

How do personal home improvement loans compare to FHA 203k streamline loans?

Unlike an FHA 203(k) loan, a personal home improvement loan is not secured by your home—it’s completely different from a mortgage refinance or home equity loan. There is no appraisal or lengthy application process. In fact, the application can be approved in as little as 24 hours and funding typically takes just a day or two, compared to 45-60+ days with a 203(k) loan. There is also no risk of foreclosure if you are unable to make your loan payments on time.

There are no hidden application fees, closing costs, or other expenses; you pay a one-time loan origination fee when your loan is approved, and there is no prepayment penalty if you pay your loan off early. Most lenders offer personal home improvement loans up to $35,000 for any type of renovation, remodel, or repair project.

Pros and cons of personal loans for home improvement

Personal home improvement loans offer virtually immediate funding and the flexibility to design your own projects and complete them the way that works best for you.

Some other advantages of personal home improvement loans include:

  • Loan terms of between 3 to 7 years let you pay off your loan more quickly. You won’t be paying for your new hot tub or bathroom remodel for the next 30 years as you would with a 203(k) loan.
  • Personal home improvement loans have fixed monthly payments so you can responsibly budget for your repairs.
  • You choose whether to DIY or hire a contractor to do the work—and the choice of contractor is completely up to you.
  • Streamlined application and funding process means you can get the money you need right away to do urgent repairs and renovations. Quick funding also lets you lock down the contractor you want without waiting for a lengthy closing process.
  • Overall borrowing costs are typically much lower with a personal home improvement loan.
  • No limitations on the type of project—unlike FHA 203k loans, you can use your personal loan for a new pool, a landscaping project, or even for structural repairs on your home.

There are a few disadvantages to personal home improvement loans, including:

  • Interest rates are typically higher than those on FHA 203k streamline loans.
  • Most lenders require a credit score of at least 640 to approve a loan. If your credit isn’t solid, you may pay a much higher interest rate—if you can find a lender at all.

How Hearth can help with your home improvement and remodeling projects

You have lots of options when it comes to financing your home improvement and remodeling work; Hearth shows you what’s available and helps you narrow down your choices. Not sure where to start? Our home improvement financing comparison tool helps you understand your options and estimate their costs.

And when you’re ready to apply for home improvement financing, our simple loan application process connects you with an extensive network of lending partners ready to help you get the cash you need to start your project right away.