FHA Updates 203(k) Rehabilitation Mortgage Insurance Program to Increase Accessibility

For background on the Federal Housing Administration (FHA)’s 203(k) rehab mortgage program, please visit the U.S. Department of Housing and Urban Development’s website.

On July 9, 2024, the FHA released revisions to the 203(k) Rehabilitation Mortgage Insurance Program.  The revisions will come into effect for FHA 203(k) mortgages originated on or after November 4, 2024.

Community Progress welcomes these changes, and we hope they make the 203(k) mortgage more accessible and effective, helping Black and Brown families in the communities we serve access resources to rehab their homes.

What is a 203(k) Rehabilitation Mortgage?

An FHA 203(k) mortgage can be used to buy a property that needs rehabilitation or to renovate an owned property. It covers both acquisition and renovation costs under one long-term fixed- or adjustable-rate loan.

There are two types of 203(k) loans: Standard and Limited. Standard 203(k)s are used for major rehabilitation and have no limit on renovation costs, while Limited 203(k)s are for less extensive, non-structural repairs, currently up to $35,000. Mortgage amounts are based on appraised value after improvements are completed, and down payments are relatively low.

The FHA mortgage pool provides opportunities to applicants who are underserved by the conventional market, especially borrowers of color and low-moderate income borrowers.

What are the new provisions for 203(k) rehab mortgages?

The changes to the 203(k) program will hopefully make it more flexible and usable for borrowers. They include:

• Increasing the maximum allowable rehabilitation cost from $35,000 to $75,000 for Limited 203(k) mortgages
• Extending the repair timelines to nine months for Limited 203(k) mortgages and 12 months for Standard 203(k) mortgages
• Increasing the allowed number of days that a borrower is unable to occupy the property during the rehab period from 15 to 30 days for Limited 203(k) mortgages
• Permitting mortgagees to increase the number of months of financeable Mortgage Payment Reserves for Standard 203(k) mortgages

These new limits and terms better reflect current costs and project timelines, which should widen the scope of properties that can benefit from the 203(k) program.

How does the update impact 203(k) consultants?

From building permits to estimating repair costs, rehabilitation can be complicated. 203(k) consultants—a key component of the 203(k) program—act as liaisons between homeowner, contractors, and lender. Consultants inspect the property and prepare cost estimates, providing the framework for borrowers to secure 203(k) mortgages. The consultant requirement aims to make originations and rehab projects more efficient.

However, prospective borrowers have historically found it difficult to find a local, approved 203(k) consultant, because there have not been enough HUD-approved consultants for the 203(k) program to reach its full potential.

The changes are designed to create incentives to deepen the bench of FHA-approved 203(k) consultants. The revised consultant fee schedule better reflects current economics around rehabilitation projects. The program also now allows 203(k) consultant fees to be financed as part of the mortgage, which should make both Limited and Standard 203(k) projects more feasible.

Growing the field of 203(k) consultants will enable the origination of more 203(k) mortgages, giving borrowers the necessary financing and expertise to repurpose vacant properties into homeownership opportunities. For communities tackling systemic vacancy, increased capacity for mortgage origination and rehab completion can help address vacant properties.

Why are these changes important?

Despite its potential to enable homeownership opportunities, the 203(k) program has been historically underutilized. Community Progress believes these changes will help make the 203(k) program a more accessible and powerful tool for aspiring homeowners.

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To learn more about the FHA 203(k) program and its revisions, we recommend the following documents and resources:

• FHA 203(k) Rehabilitation Mortgage Insurance Program home page
• Revisions to the 203(k) program (Mortgagee Letter 2024-13)
• Community Progress Blog on our response to the FHA’s Request for Information
• Community Progress’ comment letter to FHA on the 203(k) program