What Are the Steps in the FHA 203(k) Loan Process?

How Do You Get Started with a 203(k) Loan?

You get started by finding a lender that actually closes 203(k) loans and getting pre-approved for the total of the price plus repairs. Not every FHA lender offers renovation loans, so ask directly.

1. Find an experienced lender. Ask how many 203(k) loans it closed last year and whether it handles both the Limited and Standard versions.
2. Get pre-approved. The lender reviews your credit, income and debts and gives you a price range that includes repair costs.
3. Choose the version. Minor, nonstructural work under $75,000 fits a Limited 203(k). Anything structural, larger or longer than 9 months needs a Standard 203(k).
4. Find the house. Bring a contractor or consultant to showings if you can, so you know the likely repair cost before you bid.
5. Write the offer. The contract must say you have applied for 203(k) financing and that the deal depends on loan approval and on your acceptance of any extra repairs the lender requires.

Early in the process, the lender gives you form HUD-92700-A, the 203(k) Borrower’s Acknowledgement. It confirms that HUD does not guarantee the home’s condition and explains how the repair escrow, the draws and the 10% holdback work, and you sign it before closing.

How Are the Repairs Planned and Priced?

The repairs are planned through a consultant’s work write-up on a Standard 203(k) or your own work plan with contractor bids on a Limited 203(k). The lender reviews each contractor’s license, experience and references.

• Standard 203(k): the lender picks a HUD-approved 203(k) consultant, who inspects the house and writes a work write-up and cost estimate listing every repair. The consultant and you each sign a certification that you have no conflicts of interest. What that report must include is explained in what goes in a 203(k) consultant’s report.
• Limited 203(k): you submit a work plan, in any format, and a written proposal from each contractor with costs broken down by labor and materials. A consultant is optional.
• Doing your own work: if the lender agrees you have the skills, you sign a self-help agreement. The loan pays for materials only.

The lender checks that bids fall within the usual range for the area and may ask for more estimates. You also sign a written agreement with each contractor to finish the work for the bid amount and within the agreed time.

What Happens During the 203(k) Appraisal and Underwriting?

During appraisal and underwriting, an FHA appraiser sets the after-repair value from the work plan, and the lender confirms the loan fits FHA’s limits and your budget. Any safety repairs the appraiser finds are added to the plan.

The appraisal decides your maximum loan, as explained in the 203(k) appraisal page. Underwriting then checks your income and credit again, reviews the final write-up or work plan, and sets the repair escrow amount, including any contingency reserve and mortgage payment reserve. The fees that go into the loan at this point are listed in 203(k) fees and costs.

What Happens at Closing and After?

At closing, the purchase is paid, the repair money goes into an interest-bearing escrow account, and you sign a Rehabilitation Loan Agreement that sets the work deadline. Work must start within 30 days.

There is only one closing. Some costs can be paid at closing from the escrow, such as permit fees, prepaid consultant or architect fees and, on a Standard 203(k), materials that have been ordered. On a Limited 203(k), up to 50% of the estimated materials and labor can be paid up front when a contractor will not wait or has already bought materials. Your first mortgage payment is due on the normal schedule, unless a mortgage payment reserve covers it.

The deadline is up to 12 months for a Standard 203(k) and up to 9 months for a Limited 203(k). The lender can treat the loan as in default if work does not start within 30 days, stops for more than 30 days in a row, or is not finished on time.

How Do 203(k) Draws Work?

203(k) draws work by paying contractors from escrow after each stage of work is finished and inspected, with 10% held back until the end. The lender must release each approved draw within 5 business days.

Each draw request goes on form HUD-9746-A, and the lender collects lien waivers so that subcontractors and suppliers cannot later claim the house. When all work is done, you sign a letter of completion, the lender approves the final inspection, and the holdback and any escrow interest are paid out. If a change is needed mid-project, a written change order must be approved before the work is done.