All About the Limited 203(k) Rehabilitation Loan

January 28, 2021

Some borrowers want to buy or refinance a fixer-upper home and that is where the FHA 203(k) Rehabilitation loan and the FHA 203(k) Rehabilitation Refinance loan can help. You don’t have to buy a property to use this loan; you can use it to refinance your current home and get money to accomplish FHA and lender-approved upgrades.

But not all borrowers want to fully refinance a home to repair or improve it. Some have smaller projects in mind and these needs are addressed through something known as the Limited 203(k) Rehab loan which lets you accomplish smaller projects with a smaller loan.

The FHA Limited 203(k) Rehab Loan

The limited FHA 203(k) allows borrowers to apply for rehab loan funds with a maximum total repair cost of $35,000. Unlike the “regular” 203(k) mortgage or refinance, there is no repair cost minimum. In addition to limiting the total amount of money you can borrow, these Limited 203(k) loans are not intended for "major repairs" or "major remodeling" work.

What does this mean? If any of the below applies to your loan needs you may not be right for an FHA Limited 203(k):
 

• Repair or improvements expected to require more than six months to complete;
• Rehabilitation activities require more than two payments per specialized contractor;
• Required repairs arising from the appraisal necessitate a Consultant to develop a specification of repairs/Work Write-Up; or require plans or architectural exhibits; or
• The repair prevents the Borrower from occupying the Property for more than 15 Days during the rehabilitation period

With a Limited 203(k) mortgage, you cannot convert a single-family home to a multi-unit property, you can’t decrease the number of units in an existing multi-unit property, and you cannot do foundation work with this type of home loan or refinance loan.

Borrowers may not purchase an existing structure on another site and move it onto a new foundation with these loan funds, and you can’t make major structural changes to a home such as adding new rooms.

For any major renovation work mentioned above in the “prohibited” list, the standard 203(k) would be required instead of a Limited 203(k).

Options Underthe FHA Limited 203(k) Mortgage or Refinance

What CAN you do with a Limited 203(k)?
 

• Eliminate health and safety hazards that violate the HUD minimum requirements for safety;
• Repairing or replacing wells
• Repairing or replacing septic systems;
• Connecting to public water and sewage systems;
• Repairing/replacing plumbing, heating, AC systems;
• Repairing or replacing electrical systems;
• Making changes for improved functions and modernization;
• Eliminating obsolescence;
• Repairing or installing new roofing, provided the structural integrity of the Structure will not be impacted by the work being performed; 
• Siding; gutters; and downspouts;
• Making energy conservation improvements.

Talk to a participating FHA lender about the options open to you under the FHA Limited 203(k) Rehab mortgage or refinance loan--you may be surprised at how many choices you have to improve or upgrade your home.

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