The Federal Housing Administration (FHA) recently proposed enhancements to its 203(k) rehabilitation mortgage loan program. The proposed enhancements are set forth in a draft Mortgagee Letter. FHA will accept feedback on the proposed enhancements, via its Single Family Drafting Table webpage, through January 5, 2024.

The 203(k) rehabilitation loan program provides for FHA insured mortgage loans that consumers may use to purchase a home or refinance an existing loan, and that include funds to pay for the repair or rehabilitation of the home. The draft Mortgagee Letter notes that the use of the program “has declined in recent years.” In February 2023, FHA published a request for information seeking public input regarding the barriers that limit usage of the program by lenders and consumers. The proposed enhancements are based on the feedback that FHA received.

FHA advises in the draft Mortgagee Letter that “[t]o support the Biden-Harris Administration goals of increasing the stock of affordable housing and expanding homeownership opportunities, FHA is making improvements to the Section 203(k) program to make it easier for Mortgagees to originate and for Borrowers to complete needed or desired rehabilitation of their homes.” In announcing the proposed enhancements, U.S. Department of Housing and Urban Development (HUD) Secretary Marcia L. Fudge stated that “[a]t HUD, we are focused on ensuring Americans can make the repairs necessary to keep their homes safe and energy efficient,” and that “[t]hanks to the enhancements we proposed today, home rehabilitation will be more accessible for millions of homebuyers and homeowners through the Federal Housing Administration.”

There are two 203(k) programs. The Standard Program provides funds for remodeling or repair of homes, with a $5,000 minimum repair cost, and the use of an FHA-approved consultant is required. The Limited Program provides funds for minor remodeling and non-structural repairs (such as energy-efficient improvements), with a $35,000 maximum for total rehabilitation costs, and the use of an FHA-approved consultant is permitted but not required. Both Programs would be modified by the proposed enhancements. Among the proposed enhancements are the following:

  • Increasing the maximum total rehabilitation costs under the Limited Program to $50,000, and to $75,000 for high-cost areas.
  • Permitting the inclusion of the approved consultant’s costs in the mortgage amount under the Limited Program (this is already permitted under the Standard Program).
  • To account for longer repair and rehabilitation timeframes common for more complex projects, increasing the allowable rehabilitation period from six to ten months under the Standard Program, and from six to seven months under the Limited Program.
  • To allow the borrower to make payments to a supplier or manufacturer, increasing the allowable initial draw amount under the Standard Program to include up to 75% of material costs, instead of the current 50% limit.
  • Increasing the permissible mortgage payment reserve period under the Standard Program, which is a reserve to provide for mortgage loan payments during the period that the property cannot be occupied because of the rehabilitation, from six to ten months of mortgage payments.
  • Updating the consultant fee schedule to provide for higher maximum fee amounts.
  • Modifying one of the factors that determine whether a repair is considered a “major” repair that is not permitted under the Limited Program to increase the period that the repair prevents the borrower from occupying the property from more than 15 days to more than 30 days.

In connection with the announcement of the proposed enhancements, HUD Deputy Assistant Secretary for Single Family Housing Sarah Edelman noted that “[t]he thoughtful responses we received from the industry through our February request for help in identifying barriers to program use were instrumental in the development of these proposed policy updates.”