FHA 203(k) Renovation Loan Program: Turn Your Home Dreams into Reality

There are both borrower and property eligibility requirements for a Texas FHA 203k loan.

For the Borrower:

• Owner-Occupancy: The most fundamental requirement is that you must intend to occupy the property as your primary residence. This loan is not intended for investors or those seeking a second home.
• Credit Score:
  • Generally, a minimum credit score of 580 is required for the lowest down payment (3.5%).
  • If your credit score is between 500 and 579, you may still qualify but will likely need a higher down payment (at least 10%).
  • Some lenders may have their own overlays, requiring higher scores (e.g., 600 or 620-640).
• Down Payment:
  • With a credit score of 580 or higher, the minimum down payment is 3.5% of the total loan amount (purchase price + renovation costs).
  • With a credit score between 500 and 579, a 10% down payment is typically required.
  • Down payment assistance programs or gifts from family/non-profits may be allowed.
• Debt-to-Income (DTI) Ratio: Lenders will assess your DTI ratio to ensure you can reasonably afford the monthly mortgage payments. While FHA guidelines allow for a DTI of up to 43% (and sometimes higher with compensating factors), lenders will look at your total monthly debt payments relative to your gross monthly income.
• Stable Income and Employment: You’ll need to provide documentation of stable income and employment, typically through pay stubs, W-2s, and tax returns.
• Mortgage Insurance Premiums (MIP): Like all FHA loans, a 203(k) loan requires both an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP) that is paid monthly. These can often be rolled into the loan amount.
• Citizenship/Residency: Available to U.S. citizens and lawful permanent residents.

For the Property:

• Primary Residence: The property must be used as your primary residence.
• Property Type: Eligible properties generally include:
  • One- to four-unit single-family structures (you must occupy one unit if it’s a multi-unit property).
  • FHA-approved condominium units (renovations generally limited to the interior of the unit).
  • Manufactured housing (must be built on or after June 15, 1976, at least 12 feet wide, 400 sq. ft. of gross living area, and classified as real property; rehabilitation cannot affect structural components for Limited 203k).
  • Mixed-use properties where at least 51% of the gross building area is for residential use.
  • Homes that have been demolished or will be razed, provided some of the existing foundation remains.
  • An existing house or modular unit that can be moved onto the mortgaged property.
• Age of Property: The original construction of the property must have been completed for at least one year.
• FHA Minimum Standards: The property must meet FHA’s minimum property standards for safety and livability. An appraisal will determine if it meets these standards and its value after renovations. Properties that are too rundown to meet basic safety and livability standards, even with the planned renovations, may not be eligible.
• Renovation Requirements:
  • Eligible Projects: Renovations must improve the function, safety, or value of the property. This can include a wide range of repairs, such as:
    • Structural alterations (e.g., adding a room, foundation repairs, converting multi-unit to single-unit, or vice versa).
    • Major remodeling (kitchens, bathrooms).
    • Replacement of roofs, gutters, and downspouts.
    • Plumbing, electrical, and HVAC system repairs or replacements.
    • Eliminating health and safety hazards (e.g., lead paint, asbestos).
    • Accessibility improvements for people with disabilities.
    • Energy-efficient upgrades.
    • Adding or repairing decks, patios, or porches.
    • Finishing basements or attics.
  • Ineligible Projects: Generally, luxury items like swimming pools, hot tubs, outdoor kitchens, or tennis courts are not permitted.
  • Renovation Cost & Type:
    • Limited (Streamline) 203(k) Loan: For minor remodeling and non-structural repairs up to $35,000. No minimum repair amount. A HUD 203(k) consultant is typically not required.
    • Standard (Full) 203(k) Loan: For more extensive projects, including structural work, with a minimum repair cost of $5,000. The total loan amount (purchase price + renovation) must stay within FHA loan limits for the area. A HUD-approved 203(k) consultant is required to oversee the project.
  • Renovation Timeline:
    • Work must begin within 30 days of loan closing.
    • For a Standard 203(k) loan, the work typically must be completed within 12 months of closing.
    • For a Limited 203(k) loan, the work typically must be completed within 9 months of closing.
  • Contingency Reserve: A contingency fund (often 10-20% of the renovation costs) is typically required to cover unexpected expenses that may arise during the project.
  • Licensed Contractors: Generally, all work must be performed by licensed contractors. Self-help (DIY) may be allowed for certain tasks with a Limited 203(k), but licensed contractors are usually required for significant portions.

It’s important to remember that while FHA sets the general guidelines, individual FHA-approved lenders may have their own additional requirements or “overlays.” It’s best to consult directly with an FHA 203(k) loan specialist to determine your specific eligibility and the appropriate loan type for your project.