FHA makes long-awaited changes to 203(k) program

A long-awaited upgrade for the Federal Housing Administration's 203(k) program has finally hit the books, as its parent agency issued a mortgagee letter detailing changes designed to increase use.

"The changes we are announcing today for the 203(k) program are long overdue and will support greater use of this program where it is needed most – in neighborhoods where homes are affordable but need repair," said Federal Housing Commissioner Julia Gordon in a press release "Increased use of 203(k) mortgages will help modernize and revitalize homes, which supports affordable housing supply and strengthens neighborhoods."

Gordon was speaking during a Philadelphia event at a home rehabbed using the loan.

Mortgage and real estate industry groups had requested changes to the program in order to make it more feasible to put it to use.

In July 2022, the Department of Housing and Urban Development held a background briefing with the media promising to make updates to the 203(k) program.

While it's an important product for housing rehabilitation and renovation, it hasn't been modernized in quite some time, and its uses have remained narrow, an official elaborated during the briefing.

Originations were close to $4 billion in 2011, but fell to $1.31 billion by 2022.

However, when it is used, the 401(k) has helped create homeownership opportunities, such as this case in San Diego where two unrelated and not romantically involved people were able to jointly purchase a house they had been renting, in one of the most expensive markets in the country.

Some of these changes were proposed in November 2023.

The revisions affect both the limited 203(k) and the standard version.

Among other changes, FHA increased the limited 203(k) total rehabilitation cost to a maximum of $75,000 from $35,000.

It also created an annual review process for updating the maximum total rehabilitation cost for the limited product.

The rehabilitation period was extended to 12 months for the standard 203(k) and nine months for the limited.

Mortgagees are now able to increase the number of months of financeable Mortgage Payment Reserves for the standard version.

Early response from the mortgage industry has been positive.

"We support FHA's enhancements to its 203(k) program and commend them for including many of the recommendations we highlighted in our January 2024 letter, including increasing the rehabilitation disbursement cap to $75,000 on a nationwide basis for the Limited program, and extending completion timelines to better reflect current market conditions and ensure projects are completed," said Pete Mills, senior vice president of residential policy for the Mortgage Bankers Association, in a statement. 

"These changes will help return older, dilapidated homes into owner-occupied housing stock, and help first-time buyers compete with fix-and-flip investors," he added.

The Community Home Lenders of America also was supportive of the changes, "as it will greatly strengthen housing affordability measures, especially among first-time and low to moderate income borrowers," said Scott Olson, executive director, in a statement.

"CHLA has been a strong advocate for expanding the FHA program's scope to take into account cost advances," Olson continued. "We are encouraged to see such enhancement initiatives, which make the program more attractive for homebuyers using FHA loans and contractors."

National Mortgage News reached out to HUD and some 203(k) lenders but those requests had not been answered by publication time.