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The U.S. Department of Housing and Urban Development (HUD) has announced significant updates to the FHA 203(k) Rehabilitation Mortgage Insurance Program, aiming to reduce barriers and enhance the program’s effectiveness. These changes, detailed in Mortgagee Letter 2024-13, are set to take effect on November 4, 2024, and will be incorporated into the forthcoming update of the HUD Handbook 4000.1.

The 203(k) program, designed to facilitate the purchase and refinancing of homes in need of repairs, has seen a decline in usage. To address this, HUD conducted a comprehensive review, including a request for public input, which highlighted several barriers to the program’s effectiveness. As a result, HUD has implemented the following key updates:

1. Increased Rehabilitation Costs Limit for Limited 203(k): The maximum allowable rehabilitation costs for the Limited 203(k) program have been increased to $75,000. This limit will be reviewed annually to ensure it remains in line with market conditions and the needs of borrowers.
2. Extended Rehabilitation Periods: The rehabilitation period for both Standard and Limited 203(k) programs has been extended. This provides borrowers with more time to complete necessary repairs and improvements, facilitating better planning and execution of renovation projects.
3. Revised Consultant Fee Schedule and Requirements: The 203(k) Consultant fee schedule has been updated with increased fees for the preparation of Work Write-Ups and other consultant services. Additionally, the requirements for becoming a 203(k) Consultant and the process for biennial recertification have been revised to ensure higher standards and better service quality.
4. Flexible Financing Options: Borrowers can now finance consultant fees and other associated costs under the Limited 203(k) program. This change aims to reduce the upfront financial burden on borrowers, making the program more accessible.
5. Streamlined Application and Approval Process: The application and approval process for 203(k) Consultants has been streamlined. Applications must now be submitted via email to the FHA Resource Center, with a simplified recertification process every two years to maintain active status on the FHA 203(k) Consultant Roster.

The FHA 203(k) program allows for a variety of improvements, including:

• Repair or replace plumbing, heating, air conditioning, and electrical systems.
• Complete kitchen and bathroom remodeling.
• Repair or install new roofing, siding, and gutters.
• Create accessibility for persons with disabilities.
• Build an eligible accessory dwelling unit (ADU).
• Convert a one-family unit to a two- to four-family unit.
• Create additions, finish attics and basements.
• Renovate or construct a garage.
• Replace windows or flooring.
• Make energy-efficient upgrades.
• Repair structural damage.

Types of 203(k) Program Loans:

Standard 203(k):

• Used for major rehabilitation or repairs, with no maximum amount of renovation costs.
• Minimum repair cost of $5,000.
• Requires an FHA-approved 203(k) Consultant.

Limited 203(k):

• For non-structural work up to $75,000.
• No minimum amount for repair costs.
• An FHA-approved 203(k) Consultant is optional.
• The 203(k) program can be used for various property types, including:
• Single-family homes, including those with eligible ADUs.
• Two- to four-family units.
• Townhomes.
• Manufactured homes titled as real estate, where the rehabilitation does not affect the structural components.
• Eligible condominium units and site condos (improvements are limited to the unit’s interior).
• HUD Homes/Real Estate Owned properties.
• Mixed-use properties that are primarily residential (at least 51%).

Benefits of Combining the 203(k) Loan with FHA Energy and Disaster Programs:

1. Energy Efficient Mortgages (EEM): Provides financing for energy-efficient improvements with an FHA-insured mortgage. Improvements may qualify for Federal, state, and local tax credits.
2. Solar and Wind Technologies: Offers financing for new solar energy systems with an FHA-insured mortgage. Benefits include reducing utility costs and spreading payments over the mortgage term.
3. 203(h) Mortgage Insurance for Disaster Victims: Provides financing for the purchase or reconstruction of a single-family property for victims of a Presidentially Declared Major Disaster Area. This program allows for 100% financing without a Minimum Required Investment (MRI).

In a recent discussion with Wealth Stream News (WSN), Migdaliz Bernier, Director of the Home Mortgage Insurance Division at FHA Single Family Housing, provided insights into the updates to the 203(k) Rehabilitation Mortgage Insurance Program.

What motivated HUD to implement these specific updates to the 203(k) Rehabilitation Mortgage Insurance Program?

Migdaliz: HUD’s Federal Housing Administration’s (FHA) motivation to implement updates to the 203(k) Rehabilitation Mortgage Insurance Program (203(k) program) stems from the challenging housing market characterized by low housing supply and a continued aging of the existing housing stock. These circumstances have intensified the demand for affordable existing homes, which often serve as an entry point for first-time homebuyers. The 203(k) program offers a vital financing mechanism that combines the purchase or refinancing of a home with the cost of renovations, making it an ideal financing tool for today’s market conditions.

While the program has served a vital need for decades, the program requirements have failed to keep pace with the needs of the market, resulting in minimal use of the program in recent years.

To identify the issues affecting 203(k) program originations and more closely align the program with the Biden-Harris Administration’s priority of increasing housing stock and expanding homeownership opportunities, FHA embarked on a process to enhance the 203(k) program guidelines. This decision followed a thorough two-step public input process to identify inefficiencies in the program and gather suggestions for making it more attractive to borrowers and market participants. This valuable public input was used to formulate the recent updates to the 203(k) program.

How does FHA plan to monitor and evaluate the impact of these changes on program utilization and effectiveness?
Migdaliz: FHA currently monitors the performance of the Limited 203(k) and Standard 203(k) loan programs by, for example, tracking endorsement counts, loan performance, and the completion period for rehabilitation work. The new policies become effective on November 4, 2024, after which HUD will continue to routinely monitor key performance metrics to gauge the effectiveness of the enhanced guidelines.

While initial indications of the impact may be observed through the number of 203(k) loan applications and endorsements, a comprehensive evaluation of the changes will require a longer timeframe. FHA anticipates that it will take at least 9 to 12 months to fully assess the effectiveness of the updates. This period will allow for a thorough analysis of program utilization and the overall success of the enhancements.

Can you provide more details on the public input process and the key insights that influenced the updates to the 203(k) program?

Migdaliz: Most certainly! We are very proud of this deliberate and meticulous process, which acknowledges the importance of considering real-life industry experiences to address the challenges using the program. To identify potential causes of the declining use of 203(k) in recent years and opportunities to address them, and as mentioned before, FHA engaged in a two-step process to obtain stakeholder input.

The first step involved publishing a Request for Information (RFI) in the Federal Register on February 14, 2023. This RFI solicited information regarding barriers to originating mortgages under the 203(k) program and policy changes that FHA should consider for expanding preservation and renovation while increasing housing stock. FHA received 147 responses from individuals, trade organizations, non-profits, housing counselors, lenders, FHA-approved 203(k) Consultants, and contractors. Their responses covered a range of issues and recommendations, including increasing the rehabilitation cost for the Limited 203(k) program, allowing 203(k) Consultant fees to be financed for the Limited 203(k) program, increasing the rehabilitation period for both the Limited and Standard 203(k) programs, extending the period a borrower is unable to occupy the property for Limited 203(k) improvements, and increasing the 203(k) Consultant’s fees. Broader issues such as improving program outreach, awareness, and training efforts, as well as engaging with housing counseling participation, were also highlighted.

After an evaluation of the RFI comments, FHA drafted a Mortgagee Letter (ML) with proposed changes to the 203(k) program guidelines. These proposed updates were posted for public feedback on the Single-Family Housing Drafting Table web page between November 29, 2023, and January 5, 2024. FHA received feedback from 18 respondents, including three major trade associations, all of whom supported and commended FHA’s efforts to improve the efficiency and accessibility of the 203(k) program and appreciated the involvement of external stakeholders in the process. With this additional, more targeted feedback, FHA finalized the updates to the 203(k) Rehabilitation program. We are proud of this process where public engagement was encouraged, resulting in new policies that reflect current market realities thanks to public input.

What are the expected long-term benefits of these changes for borrowers and the broader housing market?

Migdaliz: The long-term benefits of these changes to the 203(k) program are expected to be multidimensional, positively impacting both borrowers and the broader housing market. For borrowers, the enhancements are designed to increase access to affordable mortgage credit and homeownership opportunities. Many entry-level homes, which, as we mentioned, are often older and in need of repair, become more accessible to first-time homeowners who may not have the cash on hand for necessary renovations after down payments and closing costs. The updated program provides access to the funds needed to bring these homes up to today’s standards, making homeownership more appealing and achievable. Borrowers will also benefit from the ability to finance the 203(k) Consultant fee under the Limited 203(k) program into their mortgage, reducing their out-of-pocket expenses and giving them access to professionals in the business who can guide them through the rehabilitation process.

For the broader housing market, these changes address the challenge of America’s aging housing stock and the reduction in the availability of affordable homes in many regions. By facilitating the renovation and retrofitting of older homes, the program provides a viable solution to the existing housing shortage. The recalibration of the 203(k) Consultant fee structure is also expected to encourage more industry professionals to participate in the program. Increased participation benefits not only borrowers but also a wide range of professionals involved in real estate sales, financing, and construction. These updates support FHA’s continuing work to expand homeownership opportunities and access to affordable mortgage financing through the FHA Single Family mortgage insurance program.

How will FHA ensure that 203(k) Consultants maintain high standards of service following the revised fee schedule and recertification process?

Migdaliz: The 203(k) Consultant plays a guiding role throughout the rehabilitation process, acting as the liaison between the homeowner, contractor(s), and lender. The consultant inspects the property and prepares a feasibility study, architectural exhibits, work write-ups, cost estimates, draw request inspections, and change orders; and ensures that all work is performed in compliance with FHA requirements.

The revised fee schedule updates the consultant fees to allow fair market compensation for the services provided. Any consultant who performs work on a 203(k) project must possess and maintain the skills, experience, and licensing to be qualified to participate on the FHA-approved 203(k) Consultant Roster. FHA-approved lenders must continue to evaluate and document the performance of these consultants on at least an annual basis to include a review of the consultant’s actual work product. To maintain high standards of service, FHA provides additional oversight and may remove a consultant from the Roster for any cause that FHA determines to be detrimental to HUD or its programs.

These updates reflect HUD’s commitment to improving its programs to better serve the needs of borrowers and support the goal of increasing affordable housing availability across the United States. For more detailed information on the updates, you can visit the official HUD website at www.hud.gov or espanol.hud.gov.

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