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FHA 203(k) standards are listed in the FHA Single Family Home Loan Handbook, HUD 4000.1. Those rules include a list of approved projects, plus a list of ineligible projects. Borrowers should know ahead of time what is allowed and what is not with these FHA rehab loans for best results when applying.

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FHA Rehab Loan Rules You Should Know

FHA Rehab Loan Rules You Should Know
March 7, 2018 - FHA 203(k) rehab loans are available for those who want to buy fixer-upper homes, or refinance a mortgage and make improvements with rehab loan funds.

FHA 203(k) standards are listed in the FHA Single Family Home Loan Handbook, HUD 4000.1. Those rules include a list of approved projects, plus a list of ineligible projects. Borrowers should know ahead of time what is allowed and what is not with these FHA rehab loans for best results when applying.

For example: cash back to the borrower is not allowed for FHA rehab loans, except specifically required to pay for materials and labor. The basic rule is that the borrower cannot "profit" from the loan in the form of money back that is not a refund or a “draw” for expenses on the renovations/upgrades.

FHA loan rules require escrow accounts to disburse 203(k) rehab loan funds, and the completed work must meet state/local building code, FHA minimum standards, and other benchmarks where applicable.

Depending on the nature of the project, certain types of repairs and renovations are allowed with FHA 203(k) loans, but other work is not. One example: FHA borrowers are allowed to repair a swimming pool with 203(k) loan funds, but FHA loan rules state the borrower may not have one installed if one does not currently exist.

Bath houses and tennis courts may not be installed, nor can barbecue pits or satellite dishes. The general rule is that FHA 203(k) loans cannot be used for “luxury” items. Speak to your loan officer to learn what the parameters are for your specific needs.

Eligible Uses For FHA 203(k) Rehab Loans

Some examples of eligible 203(k) rehab loan purposes include, but are not limited to the following as described in HUD 4000.1:
  • making structural alterations such as the repair or replacement of structural damage, additions to the structure, and finished attics and/or basements
  • rehabilitating, improving or constructing a garage
  • eliminating health and safety hazards that would violate HUD’s Minimum Property Requirements (MPR)
  • installing or repairing wells and/or septic systems
  • connecting to public water and sewage systems
  • repairing/replacing plumbing, heating, AC and electrical systems
  • making changes for improved functions and modernization
  • making changes for aesthetic appeal
  • repairing or adding roofing, gutters and downspouts
  • making energy conservation improvements
  • creating accessibility for persons with disabilities
  • installing or repairing fences, walkways, and driveways
  • installing a new refrigerator, cooktop, oven, dishwasher, built-in microwave oven, and washer/dryer
This list is not exhaustive, and there are many other projects in addition to the ones listed above that are approved for FHA 203(k) loans.

FHA 203(k) Rehab Loan Funds - Ineligible Projects You Should Be Aware Of

FHA 203(k) loan rules include a list of projects that are not allowed, which includes (but may not be limited to) the following:
  • purchase or repair of any luxury item
  • any improvement that does not become a permanent part of the subject Property
  • improvements that solely benefit commercial functions within the Property
  • swimming pools (existing swimming pools can be repaired)
  • an exterior hot tub, spa, whirlpool bath, or sauna
  • barbecue pits, outdoor fireplaces or hearths
  • bath houses
  • tennis courts
  • satellite dishes
  • tree surgery (except when eliminating an endangerment to existing improvements)
  • photo murals
  • gazebos
  • additions or alterations to support commercial use or to equip or refurbish space for commercial use
The FHA loan rules are not the only ones that can affect FHA 203(k) transactions; state law, lender standards, and building code may apply to any or all of the eligible improvements permitted under the 203(k) rehab loan program.

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