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203K Services and Construction Loans

The Benefits of HUD 203K Services and Construction Loans


Interest for 203K services and construction loans are on the rise as buyers are learning about its benefits from lenders and realtors. The 203K services and construction loan program not only creates great value for home buyers, but it allows buyers to put their own design, décor, and amenities into the home they are purchasing.

The HUD 203K services program is a construction loan that is combined with an FHA loan into a single loan and comes with all the benefits that FHA loans offer, including low interest rates and a low down payment, to mention a few. What’s more, the loans can be used for either purchase or refinance. “Anyone desiring to do home improvements right now is not going to find a better value,” says Will Johnson, a 203K consultant.

Eligible Properties

Single detached homes, multi-tenant, and mixed-use properties are all eligible for the 203K loan program. Condos were recently added to the list of eligible properties.  Manufactured homes are eligible.


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The list of allowable improvements is very broad. It includes room additions; kitchen and bathroom remodels; and electrical, plumbing, heating, A/C, and roofing repairs or replacement. It’s so broad, in fact, it even allows for houses to be taken down to the framing and rebuilt.

Two improvement lists are typically generated: the “wish list” by the buyer and one encompassing HUD minimum guidelines for health and safety that’s created by the 203K services consultant. The property must be habitable upon completion. The two lists are combined into one list for contractors to bid on.

Financial Considerations

Initially two financial issues must be considered, the loan qualification and the valuation process. The buyer consults with the lender based on credit and financial review what the loan amount they will qualify for. If the loan qualification does not meet the total costs, then the construction bid may have to be reduced. The construction bid still must retain HUD health and safety issues.

Once a finalized construction bid is complete, it’s forwarded to the 203k consultant and lender for the valuation process. The mortgage maximum needs to be calculated to underwrite a 203K mortgage loan. It’s principally based on the appraisal with improvements (construction). The mortgage maximum is based on the 110% of this appraisal.

203K Standard versus Streamline

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HUD offers two types of construction loans. 203K Streamline is tailored for simpler improvements like painting, new flooring, replacing new fixtures, or other enhancements costing less than $35,000. The advantages of this loan are that 50% of the funds are released upon close of escrow and no 203K consultant is required. But the customer will have to fund the remainder of the loan and be paid at the completion of the project. No moderate structural improvements are allowed. Lenders may require additional conditions based on the complexity of improvements.

The 203K Standard is for construction loans over $35,000. A HUD 203K consultant is required to oversee the entire project. Release of construction funds are paid through draws based on completed work. It’s best to contact a 203K consultant as soon as you decide that you want to participate in the 203K program.

The 203K Consultant

The 203K consultant’s primary role is to assist and oversee the entire process from initial feasibility to final draw inspection. The consultant is hired by the buyer, but are the eyes and ears for HUD. It is also beneficial to the buyer to have someone experienced (consultant) in working with general contractors, to ensure quality, integrity, and that deadlines are being met.

At the same time, general contractors and lenders appreciate the 203K consultant’s role in facilitating timely processing and payments of draws.

Experience Counts

In spite of its growing popularity, the 203K program is still a niche market in which realtors, lenders, and other related professionals usually have limited experience. Due to the program’s complexity, it is best to work with professionals who have experience or have access to informed resources. Many times, I’ve been pulled into a project after it’s been discovered that the realtor and lender didn’t understand the process. Even HUD’s website, where updates or changes are not easy to discern, contains dated information.

The 203K loan poses a unique set of requirements in the real estate and lending process that necessitates the additional involvement of contractors and a 203K consultant. This makes an already sophisticated real estate buying process more complex. Home inspections must be evaluated for health and safety before a construction bid can be completed. The appraisal must have the construction bid. As this is all sequential, it takes time. Avoid short escrows and penalty clauses.

Important Considerations

As soon as you decide to use the 203K program, it’s time to start assembling your team, which should consist of a lender, general contractor (GC), consultant, and realtor. All these providers are important, but selecting the right general contractor is crucial to the overall success of the project. Make sure the contractor’s state license is active [Check for License], and interview at least two or more companies. Also be sure to ask for references and experience with construction loans.

Both 203K loan programs require working capital. As most of this falls on the general contractor, make sure the GC has sufficient funds or credit to manage the cash flow of the project.

For More Information

203K consultants are the best resource. An active 203K consultant can also assist in finding other experienced resources and sort out the many nuances in how different lenders process the loan and draws. But most importantly, the 203K consultant will greatly improve the success of the end result; a custom, move-in ready value home. Check HUD’s website for 203K consultants in your immediate area.

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