FHA 203k loan

Start with a mortgage lender specializing in FHA 203k loans. NewCastle Home Loans guides you through the process, ensuring you close on time, and enjoy a stress-free experience.

• Check lender reviews.

NewCastle Home Loans verifies your financial information upfront, ensuring you can afford the home. 

• Credit report: 580 minimum score
• Employment and income
• Source of funds for the down payment and closing costs

Choose a property that aligns with your budget and that you'll be comfortable living in after renovating it.

• Make repairs and improvements to a residential house, FHA-approved condo, 2-to-4-unit, or mixed-use property.
• Hire a real estate agent to estimate the after-improved value of a home before making an offer to buy it.
• The sales contract must include an FHA 203k financing addendum.

Getting contractor bids when using an FHA 203k loan is essential because it provides a detailed breakdown of estimated costs for the renovation project.

• Reach out to licensed and insured contractors with good track records of completing similar projects. Provide each contractor with a detailed scope of work, including specific requirements, materials, and any preferences you have for the project.
• Ask for bids estimating the costs, including labor, materials, permits, the timeline for completion, and the contractor's contact information.
• Choose the contractor whose proposal best aligns with your project requirements, budget, and expectations. 

You may need to work with an FHA-approved consultant, depending on the type of FHA 203k loan you choose. The consultant will help you create a renovation plan for the property. 

• The Standard 203k loan requires a 203k consultant.
• The lender selects the 203k consultant from FHA's approved list.
• The 203k consultant identifies necessary repairs, develops a work plan, reviews contractor bids, and inspects the property.

A home inspection is essential when buying a home with an FHA 203k loan because it identifies any existing issues or defects in the property. This information is crucial for creating a comprehensive renovation plan and budget.

• Meet with the 203k consultant and the contractor to inspect the property.
• Identify potential health and safety hazards, code violations, etc.
• The 203k consultant reviews the contractor's bid and creates a detailed proposal of the work needed. 

The lender orders a property appraisal to determine the as-is and after-improved values. The after-improved value is the real estate appraiser's opinion of the property's worth after you fix it up.

The lender calculates the loan amount from the after-improved property value, giving you the financial means to transform a property into your ideal home while potentially increasing its market value.

For an FHA 203k loan, in addition to the standard documentation required for a traditional mortgage, the lender requires the following paperwork: 

• Rehabilitation Loan Agreement
• Homeowner/Contractor Agreement
• Permits

When buying a home with an FHA 203k loan, preparing for the closing prevents many last-minute complications or delays. 

• Check the Mortgage Commitment: Terms and conditions of the lender's final approval, such as the loan amount, interest rate, and monthly payment.  
• Review the Closing Disclosure: Breakdown of the costs associated with the 203k loan and the cash-to-close
• Transfer funds to the title company by cashier's check or wire transfer, covering the down payment and closing costs.

The lender typically disburses the initial draw at closing, providing the necessary funds to begin your renovation project. 

• Limits to initial draw

The lender repair escrow is an account where the lender deposits the renovation portion of your FHA 203k loan. This escrow account ensures that the necessary funds are available for your home improvement project.

You may request draws from the lender repair escrow account as the contractor completes the work. The lender will release the renovation funds in stages as the work progresses.

A contingency reserve is an additional amount of funds to cover unexpected or unforeseen costs that may arise during the renovation process. It acts as a financial cushion to address any issues or changes that may come up while the renovations are underway. 

• The contingency reserve is built into the loan and is typically 10% of the total cost of the repairs and renovations outlined in the proposal.
• The lender holds the contingency reserve funds in the repair escrow account.
• If funds remain in the contingency reserve after the upgrades are complete, the lender will pay the loan's principal balance.

As the work progresses, you and the contractor may request draws from the renovation funds deposited in the lender repair escrow account. The lender will release funds in stages after inspections, ensuring the contractor has completed the work as planned.

To finish a 203k project, the contractor must complete all property improvements according to the approved plan and local building codes. Then, the contractor schedules a final inspection and requests the last draw from the lender.

The final draw is the last disbursement from the renovation escrow account. It covers the remaining renovation costs as outlined in the FHA 203k plan.

The lender orders a final inspection from the 203k consultant or real estate appraiser, confirming that the contractor completed all renovations according to plan. Then, the lender releases the remaining funds from the renovation escrow account. If any funds remain after the final draw, the lender pays the loan's principal balance