FHA proposes changes to 203(k) program

Nine months after requesting input from the industry, the Federal Housing Administration (FHA) issued a proposal on Wednesday to enhance its rehabilitation program.

The updates include increases in the maximum rehabilitation costs for the program’s limited version, an extension of the allowable period for more complex projects and changes in consultant fees, among others. 

The 203(k) Rehabilitation Mortgage Insurance Program helps borrowers purchase a home or refinance an existing mortgage and includes the cost of repairs or rehabilitation into one new mortgage.

There are two versions: the standard, which includes structural repairs and requires an approved consultant, and the limited version, which is focused on minor renovation and repair and does not require a consultant. 

In 2022, HousingWire reported that the FHA was looking to revamp the 203(k) program to address the current affordability crisis by boosting the supply of homes. Changes also intend to align the program to be more similar and as popular as Fannie Mae‘s Homestyle for conventional borrowers.

“Thanks to the enhancements we proposed today, home rehabilitation will be more accessible for millions of homebuyers and homeowners through the Federal Housing Administration,” HUD Secretary Marcia L. Fudge said in a statement. 

“Our proposed changes to the 203(k) program add to our larger goals of increasing both housing supply and affordability through FHA’s offerings,” Julia Gordon, federal housing commissioner, added in a statement.  

In February, the FHA launched a request for information regarding the 203(k) program. 

After receiving the industry’s feedback, the FHA proposes that the maximum costs for the program’s limited version increase from $35,000 to $50,000. In high-cost areas, however, it can go up to $75,000. 

Also, in the limited program, the FHA proposes that consultant fees be included in the financed mortgage, as it is permissible in the standard version. 

Regarding consultant fees, the FHA said it’s updating the schedule, “including a streamlining of and substantial increases for, allowable fees for preparation of work write-ups and architectural exhibit reviews.” 

For example, the document says if requested by the borrower or mortgagee to determine if a 203(k) loan is feasible, the consultant may charge an additional fee of $375 to prepare a feasible study. For the preparation of work write-up, consultants may charge up to 1% of the repair costs or $2,000, whichever is lower, for repairs over $140,000. 

Changes also include increases to the maximum amount for other allowable fees, including for draw inspection, which is $375. 

“Proposed fee increases are designed to appropriately compensate consultants for their role and incent more consultants to participate in the program,” the FHA stated.

The proposal increases the allowable rehabilitation period from six to 10 months in the standard version and from six to seven months in the limited program. The change considers repair and rehabilitation timeframes common for more complex projects, per the FHA. 

Borrowers would also be allowed to include 75% of material costs into the initial draw amount, compared to 50% under the current rules, so that they can make payments to a supplier or manufacturer. 

The deadline to comment on the proposals is Jan. 5, 2024.