FHA to Enhance Its 203(k) Rehab Program

The Federal Housing Administration (FHA) has posted proposed changes to its 203(k) Rehabilitation Mortgage Insurance Program for industry feedback. The 203(k) program is designed to help borrowers purchase a home or refinance an existing mortgage and include the cost of repairs or rehabilitation into one new mortgage. The proposed changes would update key provisions of the program and are designed to make it more useful for today’s market, increase flexibility for borrowers, and decrease operational burdens for lenders, 203(k) Consultants, and other program participants.

“At HUD, we are focused on ensuring Americans can make the repairs necessary to keep their homes safe and energy efficient,” said HUD Secretary Marcia L. Fudge. “Thanks to the enhancements we proposed today, home rehabilitation will be more accessible for millions of homebuyers and homeowners through the Federal Housing Administration.”

FHA’s Standard 203(k) program can be used for both remodeling and rehabilitation, including structural repairs such as repairing a foundation, and requires the use of an FHA-approved 203(k) Consultant. The Limited 203(k) program may only be used for minor renovation and non-structural repairs, such as installing energy saving improvements, and does not require the use of a 203(k) Consultant.

“We are committed to making this program work well for the nation’s homebuyers and homeowners,” said Assistant Secretary for Housing and Federal Housing Commissioner Julia Gordon. “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 proposals reflect input the FHA received from its Request for Information published in the Federal Register on February 14, 2023, and include:

• Increasing the maximum allowable rehabilitation costs for the Limited 203(k) program from $35,000 to $50,000 ($75,000 in high-cost areas) to address increased costs associated with repairs.
• Allowing 203(k) Consultant Fees to be included in the financed mortgage amount for the Limited 203(k) program, as is currently permissible in the Standard 203(k) program.
• Increasing the allowable rehabilitation period for the Standard 203(k) program from six months to 10 months, and for the Limited 203(k) program from six months to seven months, to account for longer repair and rehabilitation time-frames common for more complex projects.
• Increasing the allowable initial draw amount to include up to 75% of material costs, versus the 50% permitted under the existing policy, so the borrower can make payment to a supplier or manufacturer.
• Updating the 203(k) Consultant Fee schedule, including a streamlining of and substantial increases for, allowable fees for preparation of work write-ups and architectural exhibit reviews. FHA is also proposing increases to the maximum amount for other allowable fees, including the Draw Inspection Fee and the Change Order Request Fee. Proposed fee increases are designed to appropriately compensate Consultants for their role and incent more Consultants to participate in the program.

“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. “We are looking forward to receiving feedback on the draft Mortgagee Letter so that we can move forward to final policy updates.

FHA is accepting feedback on its proposed 203(k) program updates, using the instructions posted on its Single-Family Drafting Table web page, through January 5, 2024.