What types of repairs are allowed with an FHA 203k loan in Reno?
An FHA 203k loan is a government-backed mortgage that bundles the purchase price of a home and the cost of its renovation into a single loan. The key is that all repairs must bring the property up to HUD's minimum standards for health and safety, along with any desired upgrades. These loans, which are available for properties throughout Nevada, including Reno, are broken into two main types.
Limited 203k
The Limited (or 'Streamline') 203k is for non-structural, cosmetic repairs. It has a simpler process and is capped at $35,000 for renovation costs.
- Allowed Repairs:
- Replacing or upgrading roofs, gutters, and downspouts.
- Repairing, replacing, or upgrading HVAC systems, plumbing, and electrical systems.
- Replacing flooring, painting, and weatherization.
- Purchasing and installing new appliances.
- Minor, non-structural kitchen and bathroom remodels.
Standard 203k
The Standard 203k is for significant projects that involve structural changes or repairs exceeding $35,000. This loan requires the use of a HUD-approved 203k Consultant to oversee the project from planning to completion.
- Allowed Repairs:
- All repairs eligible under the Limited 203k.
- Structural alterations, such as moving walls or repairing foundations.
- Room additions.
- Major landscaping and site improvements.
- Correcting health and safety violations.
Luxury items like swimming pools, tennis courts, or outdoor kitchens are generally not permitted with either type of FHA 203k loan.
Is the appraisal process stricter for FHA renovation loans in Sparks?
Yes, the appraisal process for an FHA renovation loan is typically more detailed and stringent than for a conventional loan, regardless of whether the property is in Sparks or elsewhere. This is because the appraiser must comply with FHA and HUD guidelines, which include meeting Minimum Property Standards (MPS).
The appraisal for both FHA 203k and conventional renovation loans is based on the home's 'after-repaired value' (ARV). This means the appraiser determines the home's market value after all planned renovations are completed. The lender uses this future value to calculate your loan amount.
Here's where the FHA process differs:
- FHA Appraiser and MPS: The appraiser must be FHA-approved. They will not only determine the ARV but also inspect the property for any issues that violate FHA's MPS, which focus on safety, security, and structural soundness. Any mandatory repairs identified by the appraiser must be included in the renovation budget.
- HUD Consultant's Role: For a Standard 203k, a HUD Consultant first creates a detailed work write-up and cost estimate. The FHA appraiser uses this report to help determine the after-repaired value.
In contrast, a conventional renovation loan appraisal (like for a Fannie Mae HomeStyle) also uses an ARV but doesn't have the same rigid MPS requirements. The appraiser's focus is purely on the market value based on the planned upgrades, giving you more flexibility.
When is a conventional renovation loan cheaper than an FHA 203k?
A conventional renovation loan is almost always cheaper in the long run for a borrower with a good credit score and a larger down payment. The primary reason is the cost and duration of mortgage insurance.
FHA Mortgage Insurance Premiums (MIP)
FHA loans require two forms of mortgage insurance:
- Upfront Mortgage Insurance Premium (UFMIP): A one-time fee of 1.75% of the loan amount, which is typically rolled into the mortgage balance.(The data, information, or policy mentioned here may vary over time.)
- Annual Mortgage Insurance Premium (MIP): Paid monthly for the life of the loan if you put down less than 10%. If you put down 10% or more, you pay it for 11 years.
Conventional Private Mortgage Insurance (PMI)
Conventional loans require Private Mortgage Insurance (PMI) if you put down less than 20%. However, PMI is temporary. It automatically cancels once your loan-to-value ratio reaches 78%, or you can request its removal once you reach 80% equity.
Cost Comparison: A Reno Fixer-Upper Example
Let's assume you're buying a Reno fixer-upper in Reno for $400,000 and need $50,000 for renovations. Your total loan amount is $450,000.
FHA 203k Scenario:
- Down Payment: 3.5% ($15,750)
- Base Loan Amount: $434,250
- UFMIP (1.75%): $7,600 (added to loan)(The data, information, or policy mentioned here may vary over time.)
- Total Loan Amount: $441,850
- Monthly MIP (approx. 0.55% annually): ~$202 per month for the life of the loan. (The data, information, or policy mentioned here may vary over time.)
Conventional Renovation Scenario:
- Down Payment: 5% ($22,500)
- Loan Amount: $427,500
- Monthly PMI (approx. 0.50% annually, varies with credit): ~$178 per month. (The data, information, or policy mentioned here may vary over time.)
In this example, the conventional loan has a lower monthly insurance payment that will eventually be eliminated. Over 30 years, the FHA MIP could cost over $72,000, whereas the conventional PMI might only be paid for 7-10 years, saving you tens of thousands of dollars.
Can I act as my own contractor with either of these home loans?
This is a common question from ambitious homebuyers, but lenders are very cautious about allowing it. The practice is known as a 'DIY' or 'self-help' renovation.
FHA 203k: It is extremely difficult to get approval to act as your own general contractor. FHA guidelines state that the borrower cannot do the work themselves unless they are a licensed contractor by trade. Even then, the lender must approve it, and many have overlays (internal rules) that prohibit it entirely to mitigate risk.
Conventional Renovation Loans: There is more flexibility, but it's still challenging. With a Fannie Mae HomeStyle loan, for example, a lender may allow you to do the work yourself if you can prove you have the necessary experience, licenses, and qualifications. You'll need to provide a detailed project plan, budget, and timeline. The lender will also likely scrutinize your ability to complete the project on time and within budget.
In both cases, lenders prefer you to hire a licensed and insured general contractor. They want assurance that the work will be done professionally, on schedule, and to code, protecting their investment in the property.
How do lenders handle cost overruns during the renovation?
Both FHA and conventional renovation loans require a contingency reserve to manage unexpected costs. This is a fund, typically 10-20% of the total renovation budget, that is set aside specifically for cost overruns.
For a $50,000 renovation budget, a 15% contingency reserve would add an extra $7,500 to the repair escrow account, making the total renovation portion of the loan $57,500.
Accessing the Contingency Fund
If your contractor discovers an unforeseen issue, such as hidden water damage or outdated wiring in your Sparks home, they will issue a 'change order.' This document details the extra work and cost. You, the contractor, and the lender (and the HUD Consultant for a Standard 203k) must approve the change order before funds from the contingency reserve can be released.
If the renovations are completed without using the contingency funds, the money is typically applied to the principal balance of your mortgage, reducing what you owe.
What are the credit score and down payment differences between them?
This is where the FHA 203k loan's accessibility truly stands out, making it an excellent option for first-time homebuyers or those with less-than-perfect credit.
FHA 203k Requirements
- Credit Score: The FHA minimum is a 580 FICO score.(The data, information, or policy mentioned here may vary over time.) Some lenders may set their own minimum higher, often around 620.
- Down Payment: Requires only a 3.5% down payment based on the total of the purchase price plus the renovation costs.(The data, information, or policy mentioned here may vary over time.)
Conventional Renovation Loan Requirements
- Credit Score: Lenders typically require a minimum FICO score of 620, with more favorable interest rates and PMI costs offered to borrowers with scores of 700 or higher.(The data, information, or policy mentioned here may vary over time.)
- Down Payment: The minimum down payment is 5% for a primary residence.(The data, information, or policy mentioned here may vary over time.) A 20% down payment is required to avoid PMI altogether.
The trade-off is clear: the FHA 203k is easier to qualify for, but the conventional loan offers significant long-term savings for those who meet its stricter requirements.
Which loan has a faster closing and construction draw process?
Generally, a conventional renovation loan has a faster closing and a more streamlined construction draw process. The added layers of government oversight in the FHA 203k program often lead to longer timelines.
Closing Times
- Conventional Renovation: A typical closing takes 45-60 days.
- FHA 203k: A closing can take 60-90 days, or even longer. This is due to the need to coordinate with an FHA appraiser and, for Standard 203ks, a HUD Consultant who must prepare a detailed work plan before the appraisal can even be ordered.
The Draw Process
The 'draw process' is how your contractor gets paid from the renovation funds held in escrow by the lender. After completing a phase of the project, the contractor requests a 'draw.'
- Conventional Process: The lender sends an inspector to verify the completed work. Once verified, the funds are released. This is typically a quick process managed between you, the contractor, and the lender.
- FHA 203k Process: The process involves more parties. The HUD Consultant must perform the inspection, complete the necessary paperwork, and submit it to the lender for review before funds are released. This extra step can add days or even weeks to each payment cycle, which can sometimes frustrate contractors working on a tight schedule in a busy market like Reno or Sparks. Understanding the nuances of renovation financing is key to a successful project. If you're weighing your options for a property in Nevada, discussing your specific goals with a mortgage strategist can clarify the best path forward.
Choosing the right renovation loan is a crucial step towards creating your dream home in Reno or Sparks. If you’re ready to explore your financing options and see which loan best fits your project, you can Apply now to begin the process.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
References
HUD FHA 203(k) Rehab Mortgage Insurance
