The FHA 203k program allows the financing of both the property and any repairs and upgrades of the property. Most loan programs 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 home buyer 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 203k 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.
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 203k loan program can be used to convert a one unit property to a two, three, or four family unit.
A 203k 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 203k 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 203k 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 home mortgage and rehabilitate the 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.
Luxury items and improvements that are not a permanent part of the property are not allowable under the 203k 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.
The “Limited 203k” Repair Program permits home buyers and homeowners to finance up to an additional $35,000 of repairs into their mortgage to either 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, home buyers 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 203k program, plans, consultants, engineers and/or architects are not required. All that is needed are contractor estimates for work that you would like done, and any work that the FHA appraiser deems necessary to be done for the home to meet minimum FHA requirements.
Unlike the traditional 203k program, half of the repair funds are generally available at close (or shortly thereafter), with the other half available at work completion. Once the work has been competed, the appraiser must reinspect the property to confirm, and then the request for the remaining funds can be made.
The following repairs can be financed with this program:
- Repair/Replacement of existing flooring
- Repair/replacement of roofs, gutters and downspouts
- Repair/replacement/upgrade of existing HVAC systems
- Repair/replacement/upgrade of plumbing and electrical systems
- 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 structural repairs.
- Basement waterproofing.
- Window and door replacement and exterior siding replacement.
- Well or septic system repair or replacement.