FHA Limited 203(k) in 2026: ML 2026-06 Allows Up to Four Draws

Mortgagee Letter 2026-06 (June 23, 2026) increases the maximum number of draw requests allowed under the FHA Limited 203(k) Rehabilitation Mortgage Insurance program and clarifies that multiple disbursements per draw are permitted. The letter responds to the prior two-draw framework, which FHA notes did not align with higher permitted rehabilitation costs and disrupted contractor cash flow.

This post summarizes the ML change. Underwriting and escrow release steps still follow Handbook 4000.1 and lender policy.

What changed under ML 2026-06?

FHA states the Limited 203(k) draw structure needed revision because larger single disbursements increased risk to the Mutual Mortgage Insurance Fund when work was incomplete. ML 2026-06:

• Raises the maximum number of allowable draw requests for Limited 203(k) (from the prior two-draw cap to up to four draws per the ML summary of changes).
• Allows multiple disbursements within a single draw under the Standard 203(k) release framework, applied to Limited 203(k) administration.
• Updates II.A.8.a.vii(B), Limited 203(k) Ineligible Improvements/Repairs, for rehabilitation activities that previously required more than two payments per contractor.

Brokers should read the full ML for draw timing, documentation, lien waiver, and contingency reserve rules that carry forward from existing 203(k) policy.

What stays the same?

ML 2026-06 does not replace the Limited 203(k) eligibility basics:

• Nonstructural repairs and minor remodeling within program cost caps.
• Work write-up, consultant, and escrow requirements per 4000.1.
• Mortgagee responsibility to release escrow only when required documentation and title updates are in order.

Practical workflow notes

1. Re-run scenario planning on active Limited 203(k) files created under the old two-draw assumption; confirm draw schedule with the mortgagee and contractor.
2. Document each draw request with the executed forms, completion evidence, and lien releases your investor requires.
3. Track contingency reserve use separately; ML 2026-06 retains written approval rules when borrowers request additional improvements from the reserve after initial work is complete.

Where to verify

• Mortgagee Letter 2026-06 (HUD)
• HUD Handbook 4000.1, Limited 203(k) sections referenced in the ML

For more on agency mortgage guidelines, see the Agency Guidelines hub.

This article is for informational purposes only and is not professional advice. Always verify against current guidelines before making decisions.