FHA 203K...The Contingency Reserve

Mortgage and Lending with AnnieMac Home Mortgage NMLS #38670

What's The Contingency Reserve?

The Contingency Reserve is something that needs to be addressed because it's an extremely important part of the FHA 203k loan.  The Contingency Reserve is there for cost overruns- it is a component that is put in place to protect the home buyer or home refinancer in case of additional costs or expenses that may arise as a result of the rehab.

How Much?

The Contingency Reserve can be anywhere from 10-20% of the rehabilitation costs.  This rehabilitation number is set aside in case we open up the walls and there are broken pipes, missing, etc- one never knows what can happen when walls are opened up so there must be a reserve account- just in case!


You buy a vacant property for $200,000 and add on $20,000 of rehab. They open the walls up because it’s a 1930s house with plaster walls and it ends up there's a problem with the electrical or a problem with the plumbing- and the costs exceed the initial estimate of the contractor.

Protection Offered:

Nobody could have known this and we all obviously want to make sure the customer is taken care of and that the property gets up to FHA minimum property standards.  So, with this being said, it's a great reason the Contingency Reserve is there.  It’s there to protect against all these types of things.

Additional Possibilities?

If we were to get through a project and the contingency reserve was never touched because the contractor hit the estimate "right on the head," then you have a 10-20% contingency reserve there in place, which can be used for changes, as long as there is still money left in the reserve. In this case, you could do additional projects that you initially had thought were not possible, or, as a final option, you can allow the contingency to be put back against your principal...yet another thing that can be done with the contingency!  It's something there to protect you, and,"if you don't use it, it's not like you lose it!"

Putting The Contingency Back...Any Slack In Payments?

Now, if we do put it back towards the principal balance of your mortgage, it will not lower your payment, however.  It will take down your overall balance, so that's important to remember, because people sometimes think, "well I’m lowering my balance...shouldn’t that lower my payment?"  Your payment is set, the only thing that will change your payment moving forward is the potential for your taxes and insurance to change.  Otherwise, your principal is going to remain the same.

Other Uses For Unused Contingency

Most of my customers, typically, if they have not used up all of their contingency will add certain things on- maybe there’s an extra bathroom that they now can get done- or ,maybe there's some extra carpeting or some extra hardwood floor that they hadn’t initially hoped to do, but now can.  I’ve had customers add on a deck, etc.  So, there's additional things you can do with that contingency reserve that hasn’t been used.   A majority of the time we see 10% as the contingency, except for vacant homes, where we do 15% as the norm.

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Mortgage / Finance
New Jersey Burlington County
The FHA Mortgage Group
FHA 203-k and FHA 203-k Streamline Loan Group
fha 203k rehab mortgage
jeff onofrio
contingency reserve
anniemac home mortgage

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Jamie R. Bell
Bell Realty Group at Berkshire Hathaway HomeServices NEP - Glastonbury, CT
Your Central CT Realtor

Good information to know. I've only done one FHA 203K and the only thing I remember is how slow the proces for contractor and quotes to be received. It's a great product though.

Wishing you a great year!

Jan 08, 2012 10:06 AM #1
Jeff Onofrio
AnnieMac Home Mortgage - Mount Laurel Township, NJ
FHA 203k Lender and Homestyle Reno Specialist

Thanks Jamie and yes that can be an exhausting part of the process.  Normally it gets held up because the contractors don't understand the program and its why I send as much of my time as possible educating loan officers, Realtors and contractors of what to expect and how it works. 

My average sales cycle on 203k transactions is 35-37 days.  That's because I educate all parties upfront so that we can make it move in perfect harmony.  Its not easy but it can be done!

I work with a lot of Coldwell Banker agents out of Philadelphia- and I am also licensed in CT so feel free to reach out to me if you would like some help in the future and we will make the process much smoother for you!

Jan 26, 2012 11:48 AM #2
Dave Halpern
Keller Williams Realty Louisville East (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

The 203k loan is an under-utilized tool. Many buyers could create equity by using the FHA/203k loan to buy and renovate homes that need some work.

Aug 10, 2017 09:39 PM #3
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Jeff Onofrio

FHA 203k Lender and Homestyle Reno Specialist
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