The Department of Housing and Urban Development updated its policies for 203(k) loans, which aim to modernize the program as costs for renovations rise. The revisions will take effect in early November.
With a 203(k) loan, borrowers can finance home renovations through a federally-insured mortgage. Federal backing reduces risk to lenders and increases access for consumers with lower income or credit scores. The loan has two categories: a standard version for substantial remodeling and repairs and a limited version for minor updates. 203(k) loans are available to homebuyers and refinancing homeowners.
“The needs of families change over the years and sometimes they need their homes to change with them,” says Sarah Edelman, deputy assistant secretary for single family housing at HUD.
One of the main aspects of the revision increases total renovation costs available for financing under the Limited 203(k) program from $35,000 to $75,000. The revision also extends the time limit for rehabilitations.
“It is so hard to find an affordable home to buy, and right now, homes that are often affordably priced need some work. And FHA, we (have) a pretty fantastic tool, the 203(k) program, and we wanted to update it so that it can be used and really help more families find homes where they want to live,” Edelman says.
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Major Updates To the 203(k) Program
Joe Daly has been working with renovation loans for 30 years. He’s the director of specialty projects at Guaranteed Rate Affinity, and he believes that the renovation cost limit increase for the limited 203(k) program is warranted, given the changing cost of materials and labor.
For simpler projects, a limited 203(k) loan is usually the way to go. Unlike the standard 203(k) loan, it doesn’t require hiring a consultant from the HUD.
“I think we can attract larger projects that are not complicated for more buyers, and that might help Americans continue to renovate America’s housing stock,” Daly says.
Nina Gonzalez, vice president of mortgage lending at Guaranteed Rate Affinity and loan officer of over 20 years, says “It takes a lot of money now to conduct and do good rehabs,” and that the previous limit put consumers in a hard spot, forcing them to put off necessary projects.
The expansion also extends the rehabilitation period from six months to 12 months for the Standard 203(k) and nine months for the limited program. When there’s not a lot of housing inventory to begin with, a time crunch can make the renovation process trickier. “That has always been a concern for especially first-time buyers, as they’re selecting their contractors,” Gonzalez says. “So it really helps alleviate the buyer while they’re in the trenches.”
Another change allows financing for 203(k) consultant fees in mortgages for the limited program if a borrower chooses to use a 203(k) consultant.
“Buyers now have to think about paying their real estate commission. So they’re paying for a commission, they’re paying for an inspection. They’re paying, paying, paying. So having the ability to finance your consultant fees, that is a great benefit that a lot of individuals could probably take advantage of,” Gonzalez says.
The updates also include an increase to the fees a 203(k) consultant can charge, which had not been updated since 1995. The consultants make sure the renovation is done correctly to help reduce risk for both the borrower and the lender. Edelman says that adjusting compensation to bring it closer to market rates can help attract more contractors, engineers and architects to HUD’s roster.
Before the changes, consultants could only charge up to $700 for baseline services on repairs between $30,001 and $50,000. Now, they can charge up to $1,000 for these services on any repairs less than or equal to $50,000. Similar increases in fees exist for higher repair costs.
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Will These Updates Increase the Number of 203(k) Loans?
In fiscal year 2023, 203(k) loans made up less than 1% of Federal Housing Administration loan endorsements. While this is not an especially low percentage given HUD’s diverse portfolio of offerings, the new expansions can help keep the program accessible.
“We would love to see more borrower participation in the program. We would like to see more lender participation in the program,” Edelman says. “This is a long-term body of work … We’re going to be evaluating every year whether the loan limits need to be changed. We want to make sure that this (program) is viable.”
Typically, more affordable housing stock also tends to need repairs. Through financing the cost of a home and its repairs in a single mortgage, homebuyers can pay fewer loan fees, build more equity and avoid buying a renovated home from an investor looking to turn a profit.
“Despite interest rates being so high and affordability being so out of reach, home prices have continued to rise, because there’s such a constrained housing supply. The 203(k) program is one of the few tools we have at our disposal to help increase the supply of affordable housing in the market,” says Brian Faux, director of the office of single family program development at HUD.
The median construction year for homes in the United States is 1978, according to the Census Bureau’s 2021 American Housing Survey, and existing housing stock is only getting older. Keeping the 203(k) program updated can help meet the needs of aging housing.
Ultimately, the long overdue changes aim to increase use of the 203(k) program in areas where homes are affordable but in need of repair.
“We’re obviously focused on today’s existing supply crisis, but we also need to continue to give some care and feeding to existing homes. And the reality is, even those that are not in serious disrepair are getting older. And so providing consumers with the tools to be able to make upgrades, make repairs to their homes, particularly if they can’t do so out of pocket, is important to us,” Edelman says.
“It’s a program that is incredibly beneficial and we’re excited to finally make these expansions and help it reach its full potential,” Faux says.
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