Size Limits for 203(k) Loans
Concerned that you will not be able to get a loan large enough to purchase your dream fixer-upper and make the repairs and renovations that you need? There’s good news and bad news. The good news is that there really isn’t a set-in-stone maximum loan amount for the 203(k) loan. In fact, that is true for all FHA loans. Rather than a maximum that applies across the board, the FHA sets maximums based on real estate prices in specific geographic areas. For example, the cost of a single-family home is significantly higher in San Francisco, California, than it is in Atlanta, Georgia. Therefore, those looking to purchase a home in San Francisco will have a higher loan maximum than those looking to buy in Atlanta.
FHA Loan Limits Vary by Area
With that being said, there are a few things to know about how much you can borrow. The default FHA loan limit for 2018 is $294,515, adjusted to meet market conditions in the area where you’re shopping for homes. Expect this amount to go up as time passes in order to keep pace with accelerating real estate costs, as well as the rising interest rate.
To further illustrate the situation, we’ll break down how the FHA lists loan amounts for both low cost and high-cost geographic areas below:
Low-Cost Geographic Areas
$294,515 for a single-family home
$377,075 for a two-unit property
$455,800 for a three-unit property
$566,425 for a four-unit property
High-Cost Geographic Areas
$679,650 for a single-family home
$870,225 for a two-unit property
$1,051,875 for a three-unit property
$1,307,175 for a four-unit property
203b vs. 203k Loan Limits
With all of this being said, the fact that you are pursuing a 203(k) loan rather than a 203(b) loan does have an effect on the landscape. In this situation, the FHA maximum plays some role, but you must also consider the cost of the renovations in the equation.
Prior to approving you for a loan, your lender will order two different appraisals. The first of these will be used to determine what the value of the home is on the market in its current condition. It will also determine any mandatory renovations and upgrades, such as replacing the heating system, or septic system, in order to bring the home into compliance with FHA/HUD requirements. The second appraisal will determine what the value of the home will be with the renovations. This is a sticking point for many would-be buyers.
Because the second appraisal will determine the value of the home with all of the renovations completed, you need a plan in place early on about what renovations and improvements you’re going to do. This plan should include all mandatory repairs, as well as those renovations and improvements that you want to make to make the home more livable. Note that there are improvements that you cannot make using a 203(k) loan – anything considered a “luxury” renovation, such as installing a swimming pool our outdoor kitchen is off the table.
Combining the value of the property and the cost of your improvements will give you the maximum loan amount. However, the calculation method may differ depending on your situation and your lender. If you already own the home and are refinancing into a 203(k) loan, for instance, you’ll need to consider the current mortgage balance and the costs of both rehabbing the home and your closing costs.
In almost all instances, a third valuation method is used, though. In this instance, you will take 110% of the home’s total value after improvements and multiply that by the 97.75% LTV offered by the FHA to get your maximum loan amount.
Of course, the cost of your mortgage is not the only factor in determining what you’ll pay each month. You also need to consider mortgage insurance.