The Federal Housing Administration (“FHA”) recently issued a proposal for enhancements for the 203(k) Rehabilitation Mortgage Insurance Program. The proposed changes incorporate industry feedback from a February 2023 Request for Information published in the Federal Register.
The 203(k) Rehabilitation Mortgage Insurance Program enables borrowers to finance both the purchase (or refinancing) of a property and the cost of rehabilitation through a single mortgage or to finance the rehabilitation of an existing property. The Standard 203(k) program allows funds to be used for a wide range of improvements, including structural reconstruction, and requires an approved consultant. The Limited 203(k) program provides funds for minor remodeling and nonstructural repairs and does not require a consultant, but a consultant may be used.
Specific policy changes proposed by the FHA include:
- Increase to the maximum allowable rehabilitation costs for the Limited 203(k) program from $35,000 to $50,000 to reflect increased costs for repairs. The maximum amount would extend to $75,000 for high-cost areas.
- Update to allow the cost of consultant fees to be included in the financed mortgage amount under the Limited 203(k) program.
- Update under the Limited 203(k) program to increase the number of days from 15 to 30 that repairs may prevent a borrower from occupying a property before renovations are considered a major rehabilitation.
- Increase the maximum allowable rehabilitation period in the Standard 203(k) program from 6 months to 10 months, and from 6 months to 7 months for the Limited 203(k) Program. According to FHA, the increased timeframe will allow for the completion of more complex projects.
- Update to the Standard 203(k) program to raise the maximum initial draw amount to 75 percent of material costs, increased from 50 percent under the current policy.
- Update to 203(k) Consultant Fee Schedule, with proposed increases for the maximum amount of allowable fees, including the Draw Inspection Fee and Change Order Request Fee. The fee increases are designed to more appropriately compensate consultants and incentivize more consultants to participate in the program.
The FHA announcement provides that the proposed changes are designed to make the program more useful in the current market while decreasing operational burdens for lenders, 203(k) consultants, and other program participants. “Thanks to the enhancements we proposed today, home rehabilitation will be more accessible for millions of homebuyers and homeowners through the Federal Housing Administrations,” said HUD Secretary Marcia L. Fudge.
The FHA is requesting feedback for the proposed changes through January 5, 2024. To view the Single Family Drafting Table and view instructions for submitting a comment, click here.
