FHA to raise financing limits for 203(k) mortgages

The Federal Housing Administration is proposing changes to its home improvement mortgage program, intended to make it more flexible by increasing allowable costs and fees that the loan can cover.

The update comes after the FHA issued a request in February for input on how to generate greater interest in the 203(k) Rehabilitation Mortgage Insurance Program and remove some hurdles that held back both lenders and borrowers from taking the loans.  

"We are committed to making this program work well for the nation's home buyers and homeowners," said Julia Gordon, assistant secretary for housing and Federal Housing Commissioner, said in a press release. "Our proposed changes to the 203(k) program add to our larger goals of increasing both housing supply and affordability through FHA's offerings."

The 203(k) mortgage was designed to assist consumers with purchasing a home or refinancing an existing lien by incorporating repair and renovation costs into a single loan. The agency has offered both a standard program for costlier rehabilitation needs, such as structural repairs that would require services of an FHA-approved consultant, and a limited option for minor renovations or installations. But the program has seen falling origination volumes in recent years, in part due to the exit of some lenders, as well as a shortage of consultants and increased building costs. 

In 2022, lenders produced over $1.31 billion in 203(k) originations, with volume falling for the fifth straight year. In 2011, numbers were almost three times higher, coming in that year at $3.8 billion.

New guidelines directly address some of the challenges. Key changes include an increase in the maximum allowable rehabilitation costs for the limited 203(k) program to $50,000 from the current threshold of $35,000 to account for higher repair expenses. In high-cost areas, the maximum would rise to $75,000.

The FHA will also give borrowers in the limited program the option to add approved consultant fees to a financed mortgage balance, as currently allowed for standard 203(k) loans.

Initial draws taken on the 203(k) mortgage would rise to include up to 75% of material costs compared to the existing 50%, opening up early access to funds to help pay suppliers and manufacturers.  

Additionally, the allowable period for construction and rehabilitation projects would be extended from six to 10 months in the standard program to factor in longer time frames required on some projects. For the limited 203(k) mortgage, the period would increase from six to seven months. 

The consultant fee schedule will also be streamlined with increases to maximum amounts available for preparation and reviews. 

"The 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," said deputy assistant secretary for single-family housing Sarah Edelman.

The FHA will take public feedback on the proposed changes through Jan. 5, 2024. 

The latest policy update to the 203(k) program comes after the FHA introduced new guidance earlier this fall opening opportunities for accessory-dwelling unit construction. Changes announced at that time were aimed at alleviating the existing affordable housing shortage and providing opportunities for wealth generation in underserved communities. Those updates expanded underwriting for the program's loans to include anticipated future rental payments from ADUs as available income.