FHA Minimum Standards and 203(k) Loans
The Department of Housing and Urban Development (HUD) requires that any property purchased with an FHA loan meet specific minimum standards in terms of structural soundness, safety, and security. During the property appraisal process, the appraiser will be looking to ensure that the home meets these specific standards. If the home does not meet those standards, it will not qualify for an FHA loan until the problem areas noted by the appraiser are remedied. Enforcing FHA minimum standards is important for lenders, as it helps them mitigate the amount of risk they take on, and ensures that the collateral for the loan (the home itself) can be sold to recoup costs should the borrower default on the loan.
Properties Funded With 203(k) Loans May Not Initially Need to Meet Minimum Standards
If you own a (or want to own) property that currently does not meet the FHA’s minimum standards, and you want to use an 203(k) loan to renovate it, you may be able to do so. However, you’ll need to show that you’ll be able to bring the property in line with the FHA’s minimum standards as a result of the renovation.