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How The FHA 203k Rehab Loan Works in NC

how fha loan works

The 203k Rehab Loan is FHA’s primary mortgage program for the rehabilitation and repair of most homes in NC.  The FHA Rehab Loan borrower must occupy the home, so this is not a loan for investors.  With the FHA Rehab Loan a borrower can purchase or refinance  a home and have additional proceeds for the repairs or renovation.

This is an amazing mortgage program for buyers who are looking to buy a home with huge equity potential – without having to come up with a lot of their own money after closing to do improvements and upgrades to the home!

The FHA 203k Rehab Loan can be used to purchase HUD Foreclosed Property. So Firemen, Teachers, Police Officers can buy a HUD Owned home (so one that FHA foreclosed on) for 50% of the Sales Price… then you can make renovations using the FHA 203k Rehab Loan!

This program also works with the HUD $100 down payment program. for buying HUD Foreclosed Homes! Again, for those interested in buying a HUD foreclosed home, you can make an offer to purchase to FHA, noting that you want to use the FHA $100 down program, and then also use the FHA 203k Rehab loan to make repairs to the home!

There are maximum FHA 203k Rehab Loan Limits in North Carolina , and those vary based upon the County you want to buy a house in.  We can not do manufactured homes with the FHA 203k Rehab Loan, and homes that were “flipped” within the last 90 days.

This is NOT the loan for those who want to draw cash out to do the work themselves. This is NOT a “Self Help” loan to make improvements to the home.  You MUST work with an Experienced Contractor.

How the FHA 203k Rehab Loan Works

Some of the main advantages of the FHA 203k Rehab Loan are that it allows a low down payment of 3.5%.   The Down Payment can come from a Gift or from a grant from the NCHFA.  The Seller is allowed to pay up to 6% of the closing costs.  The Loan amount can go up to 110% of the after-improved value, as determined by the appraisal.

There is no real minimum for repairs, though we don’t generally see folks use this program for upgrades and appliances that are less than $3000 to $5000. The maximum improvements allowed under the streamlined FHA 203k Rehab Loan is $35,000.

The process for the FHA 203k Rehab Loan is pretty simple.  First, the borrower is pre-approved based on  credit, assets, debt and income.

The money needed to make the down payment will be determined after a property is found.  Once a property is identified, and the contract accepted, you will need to meet with a contractor to get the full estimate of the cost of the work that you want to be done.  Once we have your final estimates, we order an appraisal.  The Appraisal is used to determine what the “AFTER” repair / improvement value of the home will be.  Once we have that figure, the down payment will be 3.5% of the “total” AFTER Rehab value of the property.  If this is a $100 down HUD Home, then, obviously, the down payment is $100.

There’s only one “Closing” for this loan. So, your payments are not going to change later, and you are not going to have to pay closing costs multiple times during the process.

The maximum number of contractors you can use with the Streamline FHA 203k Rehab Loan is 3.  The Borrowers must close on the home before any renovations of rehabilitation takes place.  At closing, in essence, an Escrow Account is established to cover paying the Contractors for their work.

The first “draw” or payment to the Contractor from the Escrow account will happen at, or shortly after, closing, for 50% of the estimated work to be done. The 2nd draw is done after the work is complete, and the inspector goes out to verify that the work is complete.  At

that time the rest of the contractors invoice will be paid.

We normally try and get all of the work completed, and have the Inspector only go out one time (even if there are 3 contractors and one finishes early) because of the extra expense to the borrower.  Each Inspection fee could be $150.

Additional Fees Associated with FHA 203k Rehab Loans

There are contingency reserves set up with the Estimates for Completion of 10%.  This means that is the cost of the house is $100,000 and you want to have $20,000 in repairs made – we will base the loan amount on $120,000 plus an extra 10% (just in case money is what I call it) – so the Total Loan will be in the amount of $132,000.

What if you don’t need that extra 10%, or in this case $12,000?  Then you get it back, and it is ALWAYS applied to the loan.  You do not get a “cash” check for this overflow. For a Streamline FHA 203k Rehab loan, the work MUST be complete within 90 days of closing on the loan.

There is an additional fee changed with this loan.  It’s called a “Supplemental Origination Fee” but really it’s a fee required by FHA to cover all of the “behind the scenes”  accounting that must be done for this type of loan.


Total Cost of Repairs:  $24,500

Contingency Reserves of 15%:  $3,675

3 Inspections of $165 per:  $945.00

Total of Cost that will be added to Sales Price (Assuming it appraises) $29,120

The Supplemental Origination Fee charged is the greater of $350 or 1.5% of the total cost. In this case the fee is $436.80

Allowed Repairs For FHA 203K Rehab Loan

There are repairs that might just include trading out appliances that you want to make with the Streamline FHA 203k Rehab Loan – and that’s perfectly okay.  Lowe’s Home Improvement and Home Depot both accept this form of “delayed” payment to purchase appliances.

Structural Repairs can also be included.  Appraisal REQUIRED repairs must be made, and there are almost no limit to the number of cosmetic items you can do.  With the FHA 203K Streamline program we can only loan an additional $35,000.

There is another “FULL” Rehab loan offered by FHA, and if you need more than the $35,000 – please call us and we will help you qualify for up to 50% of the after improved value!

Qualifying for FHA 203K Rehab Loans

The minimum credit score requirements for a FHA 203k Rehab loan is 660.  The maximum debt to income ratio for the FHA 203k Rehab loan is 45%.

The down payment can come in the form of a Gift from Family, Fiance or a partner that’s lived with you for the past 12 months.  If you qualify for the FHA Grant program from NCHFA. you can get 3% of the down payment from the State in the form of a forgivable grant, that has no payments.

Another thing the FHA Mortgage Underwriter will look at in considering your loan for approval is the difference in your housing expense now to the expense you’ll have if you buy a home. (It’s called Payment Shock ) The smaller the increase, the stronger your application looks. So if you are paying $1000 now and your new payment will be $1400, that’s probably okay if your housing ratio is not too high.

If you are paying $1000 a month now, and your new payment is going to $1800… and you have a fairly high housing ratio… we are going to look and see that you have been SAVING money every month at $1000.  We can use that information as an offsetting factor  / reason to make the loan!

If you have questions about FHA 203k Rehab Loans in NC. and you are looking for the BEST Mortgage Rates – please call Steve and Eleanor Thorne. 919-649-5058.  We are Professional Mortgage Planners with over 20 years of experience closing FHA Home Loans in NC !

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