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FHA 203K Rehab Loan

203k Program

Overview

The FHA 203(k) program allows the financing of both the property and any repairs and upgrades of the property. Most lenders will not allow financing for a home unless the condition and value of the property provide adequate loan security. When rehabilitation is required, that usually means that the lender will require the improvements be completed prior to a long term mortgage being made.

When a homebuyer wants to purchase a house in need of repair or upgrade, they generally need to first obtain financing to purchase the home, additional financing to complete the repairs, and then a permanent mortgage once the work is completed to pay off the interim loans. Often the terms of the interim financing are less than desirable. The 203(k) loan program was designed to address this situation, allowing the borrower to get just one loan, at a long term fixed rate, to finance both the purchase of the property along with the required repairs or upgrades. The mortgage amount is based upon the projected value of the home once the repairs and upgrades have been completed, taking into the account the cost of the work.

Eligible Property

To be eligible, the property must be a 1-4 unit dwelling that has been completed for at least one year. Homes that have been demolished are eligible if some of the existing foundation remains in place. In addition to typical rehabilitation projects, the 203(k) loan program can be used to convert a one unit property to a two, three, or four family unit.

A 203(k) loan can also be used for a mixed-use property under certain criteria. The property must not have greater than 25% (for a one story building), 33% (for a three story building), and 49% (for a two story building) of its floor area used for commercial purposes. The commercial use of the property also must not affect the health and safety of the occupants, and the rehabilitation funds must only be used for repairs and upgrades to the residential functions of the property.

A condominium may also be rehabilitated utilizing a 203(k) loan. Only the interior of the condo unit may be rehabilitated. Also, only the lesser of 25% or 5 units may be undergoing rehabilitation at the time of the 203(k) loan.

How This Program Can Be Used

This program can be used to accomplish rehabilitation and/or improvement of a property in three ways:

· To purchase a home and the land on which it is located and rehabilitate it.

· To purchase a home on another site, move it onto a new foundation on the mortgaged property and rehabilitate it.

· To refinance the existing indebtedness and rehabilitate such a home.

The rehabilitation loan must be a first lien. The rehabilitation funds are made available before the rehabilitation begins unless the home is being moved to another site. In that case, the funds are not made available until the unit is attached to the new foundation.

Eligible Improvements

Luxury items and improvements that are not a permanent part of the property are not allowable under the 203(k) loan program. However, the homeowner can use the program to finance such items as painting, room additions, decks, and even other items that do not need any other improvements. All health and safety items must be addressed prior to completing all general home improvements.

Streamlined 203k

This FHA insured mortgage program, called the “Streamlined 203k” Limited Repair Program permits homebuyers to finance up to an additional $35,000 of repairs into their mortgage to purchase and improve or upgrade the home before move-in or to refinance an existing mortgage and add up to $35,000 in repairs or improvements. With this new product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser. Unlike the standard 203(k) program, any FHA approved lender may originate a Streamlined 203k mortgage.

The following repairs can be financed with this program:

· Repair/Replacement of existing flooring

· Minor remodeling, such as kitchens, which does not involve structural repairs

· Exterior and interior painting

· Weatherization: including storm windows and doors, insulation, weather stripping, etc.

· Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwaves.

· Improvements for accessibility for persons with disabilities.

· Lead based paint stabilization or abatement of lead based paint hazards.

· Repair, replacement or the addition of exterior decks, patios and porches.

· Basement remodeling which does not involve sculptural repairs.

· Basement waterproofing.

· Window and door replacement and exterior siding replacement.

· Well or septic system repair or replacement.