HUD Mortgagee Letter 2026-06 — Increase in the Maximum Number of Draw Requests for Limited 203(k) Rehabilitation Mortgage Insurance Program
HUD Mortgagee Letter 2026-06 (June 23, 2026) — Increase in the Maximum Number of Draw Requests for Limited 203(k) Rehabilitation Mortgage Insurance Program. Raises the Limited 203(k) draw-request maximum to four per contractor, clarifies initial/intermediate/final draws and multiple disbursements, and updates related Handbook 4000.1 Release of Funds provisions; effective immediately. Full verbatim text captured section-by-section from the HUD source PDF.
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Verbatim regulatory text
Verbatim provisions from HUD Mortgagee Letter 2026-06 — Increase in the Maximum Number of Draw Requests for Limited 203(k) Rehabilitation Mortgage Insurance Program — each quote is a verified substring of the regulator-published source snapshot, not retyped. Quoted for reference; this is not legal advice. The operational layer (P&P updates, prompts) lives in the regulation update kits.
HUD ML 2026-06 — Purpose
This Mortgagee Letter (ML) increases the maximum number of allowable draws under the Limited 203(k) program and clarifies draw disbursement procedures to strengthen risk controls and reduce administrative burden.
HUD ML 2026-06 — Effective Date
The provisions of this ML are effective immediately. All updates will be incorporated into a forthcoming update of the HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook (Handbook 4000.1).
HUD ML 2026-06 — Affected Programs
The provisions of this ML apply to Section 203(k) Rehabilitation Mortgage Insurance Program transactions.
HUD ML 2026-06 — Background (prior ML 2024-13 changes)
On July 9, 2024, FHA increased the maximum rehabilitation amount under the Limited 203(k) program from $35,000 to $75,000 and extended the rehabilitation period from six months to nine months through ML 2024-13, Revisions to the 203(k) Rehabilitation Mortgage Insurance Program including updates to the 203(k) Consultant Requirements and Fees.
HUD ML 2026-06 — Background (draw request policy update)
FHA is updating its Limited 203(k) program draw request policy to allow a maximum of four draws per contractor and to clarify the treatment of initial, intermediate, and final draws. A scheduled intermediate draw may have two separate disbursements if needed without increasing the total number of draws permitted. While FHA has not increased the number of allowable draws under the Standard 203(k) program, FHA is clarifying that multiple disbursements per draw are allowed.
HUD ML 2026-06 — Summary of Changes
This ML: • updates Limited 203(k) Ineligible Improvements/Repairs (II.A.8.a.vii(B)) for rehabilitation activities that require more than two payments per contractor; • clarifies that multiple disbursements per draw are allowed under Standard 203(k) Release of Funds (II.A.8.a.xviii(C)(1)(d)(i)); • clarifies that a draw may include two separate disbursements under Limited 203(k) Release of Funds (II.A.8.a.xviii(C)(1)(d)(ii)); and • increases the maximum number of draw requests under Limited 203(k) Release of Funds (II.A.8.a.xviii(C)(1)(d)(ii)).
HUD ML 2026-06 — Limited 203(k) Ineligible Improvements/Repairs (II.A.8.a.vii(B))
The Limited 203(k) mortgage proceeds may not be used to finance major rehabilitation or major remodeling. FHA considers a repair to be “major” when any of the following are applicable: • the repair or improvements are expected to require more than nine months to complete; • the rehabilitation activities require more than four draws per contractor; • the required repairs arising from the appraisal: o necessitate a Consultant to develop a specification of repairs/Work Write-Up; or o require plans or architectural exhibits; or • the repair prevents the Borrower from occupying the Property for more than a total of 30 Days during the rehabilitation period.
HUD ML 2026-06 — Release of Funds — Timeliness of Release (II.A.8.a.xviii(C)(1)(d))
The Mortgagee must release funds within five business days after receipt of a properly executed draw request and title update when necessary.
HUD ML 2026-06 — Standard 203(k) Release of Funds — Maximum Number of Draw Requests (II.A.8.a.xviii(C)(1)(d)(i))
The Mortgagee may approve a maximum of five draw requests (four intermediate and one final). Each draw may include multiple disbursements. A draw with multiple disbursements counts as one draw.
HUD ML 2026-06 — Standard 203(k) Release of Funds — Contingency Reserve (II.A.8.a.xviii(C)(1)(d)(i))
To allow use of contingency funds for improvements other than health and safety when rehabilitation is incomplete, the Mortgagee must determine that it is unlikely that any health or safety deficiency will be discovered, and that the Mortgage will not exceed 95 percent of the After Improved Value.
HUD ML 2026-06 — Standard 203(k) Release of Funds — Method of Payment (II.A.8.a.xviii(C)(1)(d)(i))
The Mortgagee will release escrow funds upon completion of the rehabilitation in compliance with the Work Write-Up. The Mortgagee must issue checks to both the Borrower and contractors as co-payees, unless the Borrower provides written authorization, at each draw, to issue the check directly to the contractor. The Mortgagee may issue the check directly to the Borrower alone if the release is for: • materials for work performed under a self-help agreement; or • materials for items prepaid by the Borrower under contract with the supplier.
HUD ML 2026-06 — Limited 203(k) Release of Funds — Maximum Number of Draw Requests (II.A.8.a.xviii(C)(1)(d)(ii))
The Mortgagee may approve a maximum of four draw requests per contractor or for the Borrower (if acting as the contractor). These consist of the initial draw at closing, no more than two intermediate draws during the rehabilitation process, and release of the final draw. Each draw may include up to two separate disbursements. A draw with two disbursements counts as one draw.
HUD ML 2026-06 — Limited 203(k) Release of Funds — Total Repair Costs Less Than or Equal to $15,000 (II.A.8.a.xviii(C)(1)(d)(ii))
The Mortgagee must ensure that the repairs and/or improvements have been completed by obtaining contractor’s receipts or a signed Borrower’s Letter of Completion. The Mortgagee is not required to perform or have others perform inspections of the completed work.
HUD ML 2026-06 — Limited 203(k) Release of Funds — Total Repair Costs Exceeding $15,000 (II.A.8.a.xviii(C)(1)(d)(ii))
The Mortgagee must ensure that the repairs and/or improvements have been completed by performing an inspection or by obtaining an inspection by a third party to determine that the repairs have been satisfactorily completed. The Mortgagee must obtain a signed Borrower’s Letter of Completion.
HUD ML 2026-06 — Limited 203(k) Release of Funds — Contingency Reserve (II.A.8.a.xviii(C)(1)(d)(ii))
The Mortgagee must ensure funds escrowed in the Contingency Reserve are used solely to pay for the proposed repairs or improvements and any unforeseen items related to these repair items.
HUD ML 2026-06 — Limited 203(k) Release of Funds — Method of Payment (II.A.8.a.xviii(C)(1)(d)(ii))
The Mortgagee will release rehabilitation escrow funds upon completion of the rehabilitation in compliance with the work plan. The Mortgagee may issue checks solely to the contractor, or issue checks to the Borrower and the contractor as co-payees. The Mortgagee may issue the check directly to the Borrower alone if the release is for: • materials for work performed under a self-help agreement; or • materials for items prepaid by the Borrower under contract with the supplier.
HUD Mortgagee Letter 2026-06 — Increase in the Maximum Number of Draw Requests for Limited 203(k) Rehabilitation Mortgage Insurance Program — Background (whole section)
On July 9, 2024, FHA increased the maximum rehabilitation amount under the Limited 203(k) program from $35,000 to $75,000 and extended the rehabilitation period from six months to nine months through ML 2024-13, Revisions to the 203(k) Rehabilitation Mortgage Insurance Program including updates to the 203(k) Consultant Requirements and Fees. With no changes to the draw structure or maximum number of allowable draws accompanying these changes, FHA’s Mutual Mortgage Insurance Fund (MMIF) was put at risk through larger disbursements of funds for work yet to be completed. Further, the existing draw framework under the Limited 203(k) program has become increasingly challenging for Mortgagees as the two-draw limit does not align with the higher total rehabilitation costs now permitted. Specifically, Mortgagee feedback notes that this limitation disrupts contractor cash flow, which increases the risk of delays and in some instances project abandonment. For this reason, both FHA and industry stakeholders believe it is in the program’s best interest to increase the number of allowable draws for the Limited 203(k) program. FHA is updating its Limited 203(k) program draw request policy to allow a maximum of four draws per contractor and to clarify the treatment of initial, intermediate, and final draws. A scheduled intermediate draw may have two separate disbursements if needed without increasing the total number of draws permitted. While FHA has not increased the number of allowable draws under the Standard 203(k) program, FHA is clarifying that multiple disbursements per draw are allowed. FHA believes these operational changes will streamline rehabilitation escrow administration, strengthen risk controls, bring FHA requirements in line with industry standards, give Mortgagees clearer guidelines for draw requests, and ensure rehabilitation loan funds are managed more appropriately.
HUD Mortgagee Letter 2026-06 — Increase in the Maximum Number of Draw Requests for Limited 203(k) Rehabilitation Mortgage Insurance Program — Release of Funds (II.A.8.a.xviii(C)(1)) (whole section)
Release of Funds (II.A.8.a.xviii(C)(1)) (d) Timeliness of Release The Mortgagee must release funds within five business days after receipt of a properly executed draw request and title update when necessary. (i) Standard 203(k) Release of Funds Maximum Number of Draw Requests The Mortgagee may approve a maximum of five draw requests (four intermediate and one final). Each draw may include multiple disbursements. A draw with multiple disbursements counts as one draw. Contingency Reserve To allow use of contingency funds for improvements other than health and safety when rehabilitation is incomplete, the Mortgagee must determine that it is unlikely that any health or safety deficiency will be discovered, and that the Mortgage will not exceed 95 percent of the After Improved Value. When the rehabilitation is complete, the Borrower may use the Contingency Reserve account to fund additional improvements not included in the original Work Write-Up. The Mortgagee must obtain a change order detailing the additional improvements, including the costs of labor and materials. The Mortgagee must inform the Borrower in writing of the approval or rejection of the request to use funds from the Contingency Reserve account for additional improvements within five business days. Method of Payment The Mortgagee will release escrow funds upon completion of the rehabilitation in compliance with the Work Write-Up. The Mortgagee must issue checks to both the Borrower and contractors as co-payees, unless the Borrower provides written authorization, at each draw, to issue the check directly to the contractor. The Mortgagee may issue the check directly to the Borrower alone if the release is for: • materials for work performed under a self-help agreement; or • materials for items prepaid by the Borrower under contract with the supplier. (ii) Limited 203(k) Release of Funds Maximum Number of Draw Requests The Mortgagee may approve a maximum of four draw requests per contractor or for the Borrower (if acting as the contractor). These consist of the initial draw at closing, no more than two intermediate draws during the rehabilitation process, and release of the final draw. Each draw may include up to two separate disbursements. A draw with two disbursements counts as one draw. Total Repair Costs Less Than or Equal to $15,000 The Mortgagee must ensure that the repairs and/or improvements have been completed by obtaining contractor’s receipts or a signed Borrower’s Letter of Completion. The Mortgagee is not required to perform or have others perform inspections of the completed work. The Mortgagee may choose to obtain or perform inspections if they believe such actions are necessary for program compliance or risk mitigation. If the Mortgagee determines that an inspection by a third party is necessary to ensure proper completion of the proposed repair or improvement item, the Mortgagee may charge the Borrower for the costs of no more than two inspections per contractor. Total Repair Costs Exceeding $15,000 The Mortgagee must ensure that the repairs and/or improvements have been completed by performing an inspection or by obtaining an inspection by a third party to determine that the repairs have been satisfactorily completed. The Mortgagee must obtain a signed Borrower’s Letter of Completion. Contingency Reserve The Mortgagee must ensure funds escrowed in the Contingency Reserve are used solely to pay for the proposed repairs or improvements and any unforeseen items related to these repair items. Method of Payment The Mortgagee will release rehabilitation escrow funds upon completion of the rehabilitation in compliance with the work plan. The Mortgagee may issue checks solely to the contractor, or issue checks to the Borrower and the contractor as co-payees. The Mortgagee may issue the check directly to the Borrower alone if the release is for: • materials for work performed under a self-help agreement; or • materials for items prepaid by the Borrower under contract with the supplier.
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