The Federal Housing Administration (FHA) recently finalized enhancements to its 203(k) rehabilitation mortgage loan program in Mortgagee Letter 2024-13. This action follows the FHA proposing enhancements to the program last Fall in a draft Mortgagee Letter. Lenders must implement the enhancements for FHA case numbers assigned on or after November 4, 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. In the Mortgage Letter, the Department of Housing and Urban Development (HUD) states that it:

“[I]s committed to ensuring that its programs are as effective as possible for increasing the supply of affordable housing in the United States, particularly in underserved communities. An important means of expanding available supply is through the restoration and modernization of existing homes. As the country’s housing stock ages, property renovation is important to preserving the quality and affordability of Single Family Properties.”

The use of the 203(k) program has declined in recent years, and the enhancements are intended to expand the ability of consumers to use the program for home repair and rehabilitation purposes. Addressing this issue, the Mortgage Letter provides:

“To 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.”

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), and the use of an FHA-approved Consultant is permitted but not required. Both Programs were modified by the enhancements.

Among the enhancements to the programs are the following:

  • Increasing the maximum total rehabilitation costs under the Limited Program from $35,000 to $75,000. FHA had proposed a limit of $50,000, with a limit of $75,000 for high-cost areas. Additionally, FHA will evaluate the limit on an annual basis.
  • Permitting the inclusion of the approved Consultant’s fee 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 twelve months under the Standard Program, and from six to nine months under the Limited Program. FHA had proposed increasing the rehabilitation period under the Standard Program and Limited Program to ten months and seven months, respectively.
  • 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 twelve months of mortgage payments. FHA had proposed increasing the reserve period to 10 months.
  • 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.

To allow the borrower to make payments to a supplier or manufacturer, FHA had proposed to increase the allowable initial draw amount under the Standard Program to include up to 75% of material costs, instead of the current 50% limit. This proposal was not adopted.

When applications for approval as an FHA 203(k) Consultant are approved, the approval will now be valid for two years, and the Consultant will be provided with a recertification due date. Additionally, with regard to the Limited Program, when using an FHA approved 203(k) Consultant, the lender will be required to select a Consultant that is active on the FHA 203(k) Consultant Roster for the state in which the property is located, and the lender must not use a Consultant who has demonstrated previous poor performance based on reviews conducted by the lender. Similar requirements already exist for Consultants under the Standard Program.

In an announcement of the enhancements, HUD Acting Secretary Adrianne Todman stated “HUD has programs not only to help families purchase a house, but to help them repair their homes.” “Today, we are modernizing and expanding this program, helping both homebuyers and homeowners fix up their homes. This is one more action the HUD and the Biden-Harris Administration is taking to improve our country’s housing supply.”