If you want to buy a home that requires a little rehab work, you can with the FHA 203(K) streamline loan. The FHA provides borrowers of this loan with funds to buy and rehab the home. Keep in mind, the repairs and improvements must be minor. If you get too out of hand, you’ll need the full 203(K) loan which requires a lot more paperwork and has many more restrictions.
The FHA 203(K) streamline loan is the perfect option for cosmetic and non-structural repairs.
The Eligible Repairs
First, let’s focus on what you can do with the funds from the 203(K) streamline loan.
- Fix or replace the home’s roof or gutters
- Fix or replace the HVAC system
- Fix or replace the electrical system
- Fix or replace flooring
- Make cosmetic or non-structural changes to the kitchen or bathrooms
- Paint the interior or exterior of the home
- Install new windows or doors
- Add weather stripping or insulation
- Make accessible changes to the home
- Fix or replace a patio or deck
- Add a patio or deck
- Finish a basement as long as there is no structural work
- Waterproof a basement
- Fix or replace septic system
- Purchase and install new appliances
Of course, just as there is a list of eligible repairs, there is also a list of ineligible repairs. Basically, anything structural or that involves a load-bearing wall is ineligible. In addition, you cannot add any rooms to the home or do any landscaping work with the 203(K) streamline loan.
Requirements for the 203(K) Streamline Loan
Aside from the eligible repairs, there are other strict requirements you must meet in order to qualify for the 203(K) streamline loan:
- The total cost of the repairs may not exceed $15,000
- The contractors must be licensed and approved by the lender
- You must provide a copy of the agreement between you and the contractor for the work
- If you plan to do the work yourself, you must provide proof of your experience and ability to do the work
- You must be able to move into the home within 30 days of closing
- The work must be completed within 6 months of the closing date
Paying the Contractors
The FHA 203(K) streamline loan carries strict requirements regarding how the contractors receive payment. The lender may only give the contractors 50% of the contracted price upfront at the closing. The remaining 50% gets paid after the work is completed and the lender is satisfied that all subcontractors have received payment. The lender wants to make sure no mechanic’s liens will hit the property, putting the FHA loan in jeopardy of losing first lien position.
If you do the work yourself upon approval of the lender, you’ll only receive payment for the materials you purchase. The lender will not reimburse you for your time and labor.
The FHA 203(K) streamline loan has relaxed guidelines regarding how borrowers and/or contractors prove the work is completed. The full 203(K) loan requires a third party loan consultant to inspect the property and give the final ‘ok.’ The streamline loan, however, only requires the borrower to provide proof with a letter stating the work is completed to their satisfaction or with receipts from the contractors showing the work is complete.
Qualifying for the FHA 203(K) Streamline Loan
Qualifying for the FHA 203(K) streamline loan is just like any other FHA loan. You must meet the following:
- Minimum credit score of 640
- No bankruptcies or foreclosures in the last 3 years
- Maximum one 30-day late housing payment in the last 12 months
- Consistent employment and income history
- Adequate proof of income
You must also prove the home will be your primary residence. As stated above, you must be able to live in the home within the first 30 days. If the work is so extensive that you cannot live in the home, you’ll need the full 203(K) loan.
The FHA 203(K) streamline loan offers homebuyers and even homeowners a great opportunity to fix up their home. The FHA offers low interest rates and fees, making it easy to wrap the home improvement costs into the loan. Without the need to take out a 2nd mortgage, there is less confusion and a greater ability to knock the principal balance down faster.