FHA Rehabilitation Loan Program (203k)

by


HUD's 203(k) program can help you to purchase or refinance a property plus include in the loan the cost of making the repairs and improvements. The FHA insured 203(k) loan is provided through approved mortgage lenders nationwide. It is available to persons wanting to occupy the home.


The down payment requirement for an owner-occupant (or a nonprofit organization or government agency) is approximately 3% of the acquisition and repair costs of the property.

The property must be a one to four-family dwelling that has been completed for at least one year to be eligible. According to the provisions of local zoning requirements, the number of units on the site must be acceptable. All newly constructed units must be attached to the existing dwelling. Cooperative units are not eligible.

Provided some of the existing foundation system remains in place, homes that will be razed or have been demolished as part of the rehabilitation work, are eligible.

This program can be used to convert a one-family dwelling to a two-, three-, or four-family dwelling, in addition to typical home rehabilitation projects. An existing multi-unit dwelling could be decreased to a one to four-family unit.

An existing modular unit or house on another site can be moved onto the mortgaged property; however, until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed.

A 203(k) mortgage may be originated on a "mixed use" residential property provided: (1) The property has no greater than thirty-three percent (for a three story building); twenty-five percent (for a one story building); and forty-nine percent (for a two story building) of its floor area used for commercial (storefront) purposes; and (2) the rehabilitation funds will only be used for the areas used to access the residential part of the property and for residential functions of the dwelling; (3) the commercial use will not affect the safety and health of the occupants of the residential property.

FHA also permits Section 203(k) mortgages to be used for individual units in condominium projects that have been approved by the Department of Veterans Affairs, FHA, or are acceptable to FNMA under the guidelines listed below.

Because large scale development has considerably more risk than individual single-family mortgage insurance, the 203(k) program was not intended to be a project mortgage insurance program. Therefore, condominium rehabilitation is subject to the following conditions:

1) Qualified non-profit borrowers and occupant/owner only; no investors;

2) Rehabilitation is limited only to the interior of the unit. Except for the installation of firewalls in the attic for 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;

3) The maximum mortgage amount cannot exceed one-hundred percent of after-improved value.

4) Only the lesser of five units per condominium association, or twenty-five percent of the total number of units, can be undergoing rehabilitation at any one time;

The individual buildings within the condominium must not contain more than four units, after rehabilitation is complete. Section 203(k), by law, 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, all individual structures must be detached or can only have four units.

Example: 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), and likewise, 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).

The condominium project must be approved by HUD prior to the closing of any individual mortgages on the condominium units, similar to a project with a condominium unit with a mortgage insured under Section 234(c) of the National Housing Act.

This program can be used to accomplish improvement and/or rehabilitation of an existing one-to-four unit dwelling in one of three ways:

1) To rehabilitate such a dwelling and refinance existing indebtedness.

2) To purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehabilitate it.

3) To purchase a dwelling and the land on which the dwelling is located and rehabilitate it.

To rehabilitate a dwelling and refinance existing indebtedness and to purchase a dwelling and the land on which the dwelling is located and rehabilitate it, the loan proceeds (other than rehabilitation funds) must be available before the rehabilitation begins and the mortgage must be a first lien on the property.

To purchase a dwelling on another site, move it onto a new foundation and rehabilitate it, the mortgage must be a first lien on the property; however, loan proceeds for the moving of the house cannot be made available until the unit is attached to the new foundation.

Improvements and luxury items that do not become a permanent part of the real property are not eligible as a cost rehabilitation. However, the homeowner can use the 203(k) program to finance such items as room additions, painting, decks and other items even if the home does not need any other improvements. All safety, health, and energy conservation items must be addressed prior to completing general home improvements.

Other FHA Home Loans Available With Bad Credit

Find out the FHA Mortgage Loan With Bad Credit

Find out the Benefits Of A Bad Credit FHA Mortgage Loan

Although all information has been written in good faith and reviewed, please email us at [email protected] to report any inaccuracies.