FHA 203k loan

Summary:

Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home.

Purpose:

Section 203(k) fills a unique and important need for homebuyers. When buying a house that needs repair or modernization, homebuyers usually have to follow a complicated and costly process. The interim acquisition and improvement loans often have relatively high interest rates, short repayment terms and a balloon payment. However, Section 203(k) offers a solution that helps both borrowers and lenders, insuring a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property. Section 203(k) insured loans save borrowers time and money. They also protect the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequate security.

For less extensive repairs/improvements, see Streamlined 203(k). For housing rehabilitation activities that do not also require buying or refinancing the property, borrowers may also consider HUD's Title I Home Improvement Loan program.

Type of Assistance:

Section 203(k) insures mortgages covering the purchase or refinancing and rehabilitation of a home that is at least a year old. A portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.

Many of the rules and restrictions that make FHA's basic single family mortgage insurance product (Section 203(b)) relatively convenient for lower income borrowers apply here. But lenders may charge some additional fees, such as a supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehabilitation plan, and a higher appraisal fee.

Eligible Customers:

All persons who can make the monthly mortgage payments are eligible to apply. Cooperative units are not eligible; individual condominium units may be insured if they are in projects that have been approved by FHA or the Department of Veterans Affairs, or meet certain Fannie Mae guidelines.

Eligible Activities:

The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. Section 203(k) insured loans can finance the rehabilitation of the residential portion of a property that also has non-residential uses; they can also cover the conversion of a property of any size to a one- to four- unit structure. The types of improvements that borrowers may make using Section 203(k) financing include:

• structural alterations and reconstruction
  

• modernization and improvements to the home's function
  

• elimination of health and safety hazards
  

• changes that improve appearance and eliminate obsolescence
  

• reconditioning or replacing plumbing; installing a well and/or septic system
  

• adding or replacing roofing, gutters, and downspouts
  

• adding or replacing floors and/or floor treatments
  

• major landscape work and site improvements
  

• enhancing accessibility for a disabled person
  

• making energy conservation improvements

HUD requires that properties financed under this program meet certain basic energy efficiency and structural standards.

TO FIND OUT IF Y

Q&A: Rehabilitation 203(k) Mortgage Insurance Want More Information? SUBSCRIBE to the Single Family Housing email list. You will get frequent updates to the HOC Reference Guide, training and event announcements, mortgagee letters and notices about your Single Family business. ACCEPTABLE PROPERTY TYPES BORROWER ELIGIBILITY ELIGIBLE IMPROVEMENTS PROGRAM QUESTIONS  LENDER QUESTIONS  ACCEPTABLE PROPERTY TYPES Does the rehabilitation construction have to comply with HUD's Minimum Property Standards? Yes. The improvements must comply with HUD's Minimum Property Standards (24 CFR 200.926d and/or HUD Handbook 4905.1) and all local codes and ordinances. <back to top> Is the Section 203(k) program restricted to single-family dwellings? No. The program can be used for one-to-four unit dwellings. Maximum mortgage limitations are the same as for properties under Section 203(b). <back to top> Can Section 203(k) be used to improve a condominium unit? Yes, however, condominium rehabilitation is subject to the following conditions: A. Owner/occupant and qualified nonprofit borrowers only; B. Rehabilitation is limited only to the interior of the unit. Mortgage proceeds are not to be used for the rehabilitation of exteriors or other areas which are the responsibility of the condominium association, except for the installation of firewalls in the attic for the unit; C. Only the lesser of five units per condominium association, or 25 percent of the total number of units, can be undergoing rehabilitation at any one time; D. The maximum mortgage amount cannot exceed 100 percent of the after-improved value. After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units. By law, Section 203(k) can only be used to rehabilitate units in one-to-four unit structures. However, this does not mean that the condominium project, as a whole, can only have four units or that all individual structures must be detached. Example: A project might consist of six buildings each containing four units, for a total of 24 units in the project and, thus, be eligible for Section 203(k). Likewise, a project could contain a row of more than four attached townhouses and be eligible for Section 203(k) because HUD considers each townhouse as one structure, provided each unit is separated by a 1 1/2 hour firewall (from foundation up to the roof). Similar to a project with a condominium unit with a mortgage insured under Section 234(c) of the National Housing Act, the condominium project must be approved by HUD prior to the closing of any individual mortgages on the condominium units.<back to top> Can a six (or more) unit building be done using the 203(k) program?  No. However, the building could be renovated and reduced to a four unit building. Can nonresidential (storefront) property be eligible for a 203(k) insured loan? Yes. Mixed-use residential property is acceptable provided the property has no 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 (storefront) purposes. The rehab funds can only be used for the residential functions of the dwelling and areas used to access the residential part of the property. <back to top> Can HUD-owned properties be purchased using the 203(k) loan? Yes. However, the property must be advertised that it is eligible for financing with a 203(k) loan. If the HUD-owned property is purchased with other funds, a 203(k) loan can be made after the property is in the buyers name. In this case, cash back will be allowed to the borrower for a period of six months from purchasing the HUD-owned property. BORROWER ELIGIBILITY Can an investor use the 203(k) program? No. In October, 1996, the Department placed a moratorium on investor participation in the 203(k) Rehabilitation Mortgage Program. <back to top> Can a local government agency or a nonprofit organization use the 203(k) program? Yes. The same qualification requirements will be used as for an owner-occupant of the property. <back to top> What is the definition of a First-Time Homebuyer? A single person or an individual and his or her spouse who have not owned a home (as a tenant in common or as a joint tenant by the entirety) during the three years immediately preceding the date of application for the 203(k) loan. Any individual who is legally separated or divorced cannot be excluded from consideration, because the three-year waiting period does not apply, provided the individual no longer has an interest in the home. <back to top>

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