FHA 203k Rehab Loans and VA Loans: Mortgages for the New Economy

Real Estate Agent with Coldwell Banker Traditions

By:  Elaine VonCannon, RE/MAX Hall of Fame, ABR, SRES, REALTOR, Notary Public, Team Manager, NARPM, Member of the Va. Commercial Alliance, Award Winning Agent

Are you searching for a home and disappointed by the options available? Perhaps the home you can afford is too small for your requirements, or in need of extensive repair or upgrades. Two important federal government loan programs may be available for home buyers who qualify. These include VA Loans (Veterans Administration) for military personnel who have served in the Armed Forces and a 'fixer upper' loan, the FHA (Federal Housing Authority) 203k Rehab Loan. These two loans are reliable financing options for the new economy.

The FHA 203k program requires the home buyer use the property as a primary residence. The FHA 203k rehab loan cannot be used for investment property. The only exception to this rule is if the buyer is a qualified non-profit.

VA Loans are also designed for those seeking mortgage financing for their primary residence. New regulations for the VA Loans include lower credit scores and 100% financing.

Home Buying Guidelines for FHA 203k Loan Program

In the present real estate market, foreclosures are common. Many properties have been sitting empty or they were not properly cared for when owners lived in them. These properties are functional living spaces in need of repair or renovation.

Money is tight and home buyers are unable to obtain additional financing in addition to their mortgage for repairs and renovations. In response, the federal government has created the FHA 203k Rehab Loan so additional resources are available to qualified home buyers. "This is the only loan that some home buyers can afford when purchasing a home that needs renovations," says J. Mansisidor, V.P. Branch Manager of SunTrust in Williamsburg, Virginia.

The 203k Rehab loan adds another layer to financing a home. After a property is selected by the buyer in a desirable neighborhood, the agent conducts a preliminary feasibility analysis. This analysis lists repairs necessary, and tallies the cost of rehabbing the property. The real estate agent also estimates a final market value on the home after repairs. The feasibility analysis needs to be conducted prior to ordering appraisals or estimates, to determine if the cost is too high to make the purchase worthwhile for a home buyer and the lender.

The real estate agent and buyer will execute a contract to purchase the property if costs of repairs and home purchase are aligned with current market values. A home buyer must have a sales contract in order to apply for a 203k Rehab loan . Within the contract there is a clause stating the sale will be contingent upon financing through the government lending program. Home buyers apply for the 203k Rehab loan through an approved HUD lender. Once the application is complete, the buyer obtains written estimates for the repair work needed. HUD lists approved contractors and fee consultants on the organization's website.

Once the house is under contract and estimates are obtained, two different appraisals are needed. The first appraisal will be made on the current value of the home; the second appraisal will be an assessment of the value of the property after repairs are completed.

"The lender sets the loan at the value of the property when the repairs are complete," says Mansisidor. The mortgage cannot exceed the lesser of either the value of the home in its existing condition plus the cost of repairs and 6 months' worth of mortgage payments; or 110% of the estimated value of the home after repairs. The amount of the loan is also subject to maximum FHA mortgage limits, which vary from place to place.

Homebuyers may either hire a qualified contractor, or perform the repair work themselves. If the homebuyer completes repairs, the loan will only pay for materials. Leftover funds for repair can be used for additional repairs, or applied to the loan principle. Repairs must be completed on the home within six months of the purchase. The repair funds are distributed incrementally, and a HUD inspector reviews progress before more funds are released.

Homebuyers may close on the home with as little as 3.5% down. If the home cannot be lived in while renovations are in progress an additional six months of mortgage costs can be added to the loan so that the homebuyer may live somewhere else while repairs are being done.

VA Loans

VA Loans are a federal government lending program designed for Armed Force's members both active and reservist. The requirements have changed dramatically in the past few years. Previously, "credit scores were not required for VA Loans," says Mansisidor, "manual underwriting was applied to the VA Loan process.

Nowadays underwriters, loan officers, and lenders are more cautious. Most lenders now require a minimum 620 credit score. Mansisidor says in the majority of applicants who are approved VA Loans, "Debt to income ratio does not exceed 50%." He also cautions that "applicants should be two years removed from bankruptcy prior to their application date and there must be no late payments on debts for at least 12 months."

There are substantial advantages for those approved for VA Loans. "This is the only loan right now, other than first time homebuyer loans, that offers 100% financing," says Mansisidor. He adds, "No mortgage insurance is required for this loan because the government insures it. This can be a large savings, especially with VA jumbo loans."

The federal loan programs outlined above show that political leaders are working on improving the mortgage financing options available. Home buyers need to keep their credit scores, debt to income ratio, and objectives with home renovations in line with monthly earnings to ensure mortgage approval for both programs.

More information on counties in Virginia and estate homes go to www.estatesinvirginia.com for viewings. Elaine VonCannon and her team will be glad to assist you in all your real estate needs.  Other web sites to view about Elaine VonCannon, Virginia and her listings go to www.voncannonrealestate.com or www.elainesrealestate.com  Thank You for your time and interest.
Elaine is a published author on real estate both commercial, residential and property management.  Her articles are on her web sites for you to read and enjoy.

Email: voncannonrealestate@gmail.com, Direct number:  757-288-4685


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Rossman Realty Group - Cape Coral, FL


I'm dealing with a 203k loan as I type this and let me tell you something: It's pain in the ***

We are under contract since 3 months now and nowhere near closing. There is still no closing date set...

I close short sales faster...

Jun 07, 2010 09:21 AM #1
Edward Cooper
Retired Mortgage Banker - Lender Consultant - Homewood, IL
all the best, all the time.


Thank you for your blog, on FHA's full 203K loan program as well as your information on VA loans.  On  May 20th I hosted and was the key speaker on the 203K streamline version of the 203K program (http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/95-40ml.txt).  The full 203K program has been around for sometime (since 1978) but has grown in popularity during recent times (HUD publishes an origination report  listing all lender activity along program lines).  The Comptroller of Currency has a Fact Sheet available covering both versions of the 203K program as does HUD: http://www.hud.gov/offices/hsg/sfh/203k/203kmenu.cfm .

The 203K/Streamline is of particular value these days, in that it is a very straight forward program and is used in those cases where structural repairs are not required, thus many folks that may not consider a home because it needs a little TLC, using the 203K Streamline program allows them to acquire and renovate a given property (modernize) a property into something that meets their current and immediate future needs.

I am a big fan of these two loan programs, they make sense.  Moreover they are consistent with HUD'S primary goal of: "Restoring and preserving America's existing housing stock" via these particular loan products.

VA Loans are a different story with me, I am a Veteran and I have been originating all manner of government loans for years.  Veterans are given a benefit by virtue of their service in this case we are focusing in on the VA Residential Loan Program benefit.  Veterans are tasked with paying a whooping VA Funding fee for this benefit: 2.15% first time use ans 3.3% for subsequent use (I need a better understanding of the word benefit I guess....).

Good to read your blog.


Jun 07, 2010 09:24 AM #2
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

Hi Elaine -- I've had buyers use both these loans and they are really needed and helpful that would otherwise keep some buyers out of the market.  The VA also has a waiver of the VA Funding Fee if a service member has a 10%+ disability, which can help offset some of the costs as well (I wish this was needed (ie. no disabilities) but I'm glad it's there given the wars ongoing and the disabilities our service men and women are incurring.

Jun 07, 2010 11:03 AM #3
Edward Cooper
Retired Mortgage Banker - Lender Consultant - Homewood, IL
all the best, all the time.

Elaine and Claude,


So sorry to hear of your experience thus far with the 203K program, from what I gather from your remarks you must be doing a full 203K, Those can take a little time, but not the amount of time you are talking about to just get  to closing.  The programs do require a fair amount of documentation, that is why preparation and experience with these excellent programs is so important.  I wish you all the best as you move through the process and I am certain the next couple of them that you do will go much, much smoother.


Jun 07, 2010 11:05 AM #4
Edward Cooper
Retired Mortgage Banker - Lender Consultant - Homewood, IL
all the best, all the time.

Elaine and Chris,

You are absolutely correct, the Veterans Administration does have a waiver component for those who have served and have suffered injury as a result of their service.  And yes I agree with you it is a good thing that this waiver is available.  But I can recall not very long ago when the VA Residential loan program was offered without the need of a funding fee expense for Veterans.

Jun 07, 2010 11:10 AM #5
Eric Michael
Remerica Integrity, Realtors®, Northville, MI - Livonia, MI
Metro Detroit Real Estate Professional 734.564.1519

I've only done a couple of these type of transactions (203k). Seems like a buyer is all gung-ho when I tell them about the possibilities, but then the mortgage person either goes all squirrely or can't do them. I have a buyer right now that can't go conventional, so maybe we can try this loan again, with someone that's a bit more capable than those in the past.

Jun 07, 2010 12:31 PM #6
Michael Cantwell
Envoy Mortgage - NMLSR ID #644428 - Palm Beach Gardens, FL



In reading your informative blog I see two quick things that I would like to add.  First, the conventional renovation loan is available for investors, 2nd home buyers and first time home buyers that want to put 20% down and avoid PMI.  In addition you can use 417K (FNMA max in US today or the High Balance amount if a particular county qualifies) which is often higher than the FHA max mortgage limits.  

The other information from blog about using or needing two appraisals isn't correct as only one appraisal is done but it will include as is value and after improved value and does cost more because of that.  At least that is how my bank does it and every other bank I know of.  I am sure that each bank has its own rules in this regard but wanted to offer this clarification to assist your readers.

Renovation loans rock!



Jun 08, 2010 12:27 AM #7
Paul McFadden
Paratex - Seattle, WA
Pest Control, Seattle, WA.

Elaine: Thanks for this. It's nice as a loan officer to have these programs available to us. Have a great day!

Jun 08, 2010 03:00 AM #9
Michael Collins
*ROCK REALTY|Broker|Realtor|Real Estate|WI Short Sale Agent* - Janesville, WI
CDPE, SFR , Wisconsin Short Sale Specialist Realto

I have a buyer who is considering this type of loan.  I'd love to hear more comments on how the 203k streamline has or has not worked for your clients.

Jun 08, 2010 03:10 AM #10
Pam Simpson
Bob Leigh & Assoc., LLC - Senatobia, MS
GRI, Broker-Assoc.

I have completed a couple of regular 203k sales.  One of them went fairly smooth while the other one was in conjunction with a grant and it took a lot of patience.  The best advice I can give on these is to (1) become familiar with the process, (2) make sure the lender has closed this type of loan before and knows the process very well, (3) have a contractor that has done these before and knows what is expected of them (4) manage the buyers expectations. 

Jun 08, 2010 03:53 AM #11
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