The second type of 203(k) loan applies to improvements costing more than $35,000.
A 203(k) loan requires a minimum of $5,000 to be spent on rehabilitation of the home. Generally, the maximum mortgage amount depends on the lesser of the borrower's approval limit, the FHA maximum mortgage limit for the area or 110 percent of the appraised value of the improved property.
While 203(k) loans may be a great option for many homeowners, they also come with some restrictions.
For example, 203(k) loans can be used for refinancing as well as purchase loans, but are limited to owner/occupants. Investors are not eligible.
In addition, work has to begin within 30 days of closing and be complete within six months. The borrower is allowed to be the contractor if qualified, but cannot be paid for anything outside the cost of materials and must meet specific FHA qualifications.
If a contractor is being used, be sure to ask if they have done 203(k) programs before, says Mike Tompkins, a mortgage consultant with W.J. Bradley Mortgage Capital in Scottsdale, Ariz. "The contractor needs to understand the payment schedule and requirements."