There are two loan types that are commonly referred to as FHA 203k's. There is the full 203k and then the 203k streamline. These loans are both rehabilitation loans used when purchasing or refinancing a property that needs repairs, updating or rehabilitation. Since this is an FHA program the property must be used as a primary residence.
The difference between the two types of loans is in the scope of work that needs to be done. For example, if you were purchasing or refinancing a property and wanted to replace counter tops, flooring and cabinets it would be a 203K streamline. The dollar amount of contracted work is $5000-$35,000.
If you were to purchase or refinance a property that you wanted to knock down a couple of walls or add a room that would be a full 203k loan.
Luxury items and improvements are not eligible as a cost rehabilitation. However, the homeowner can use the 203(k) program to finance such items as painting, room additions, decks and other items even if the home does not need any other improvements. All health, safety and energy conservation items must be addressed prior to completing general home improvements.
The loan amount is calculated by the lower of purchase or appraised value + the bids for work to be completed. The down payment for a purchase is 3.5% of the above total. There is usually a 10% contingency amount added to the bids to cover cost overruns and uncompleted work. If the contingency funds are not used they are applied to the outstanding principal balance of the loan.
Work does not begin before you close the loan on the property. After closing, work begins and the contractor(s) are paid in draws by the bank. There are required field inspections to be sure the work was completed in a professional manner before the funds are released to the contractor.
The above was meant as a quick overview. These are loan programs with many variables which can't easily be covered here. Contact me with specific questions you may have.
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