Tuesday, April 13, 2010

FHA 203K Loan to Finance and Rehab property

The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. The 203k can be used to refinance existing indebtedness and rehabilitate a dwelling.

Eligible Property

To be eligible, the property must be a one- to four-family dwelling that has been completed for at least one year.
Homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided some of the existing foundation system remains in place.

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

It can also be used to purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehabilitate it.

Condominium Unit

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

Condominium rehabilitation is subject to the following conditions:
- Owner/occupant and qualified non-profit borrowers only; no investors;
- Rehabilitation is limited only to the interior of the unit. ( except for the installation of firewalls in the attic for the unit);
- 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;
- The maximum mortgage amount cannot exceed 100 percent of after-improved value.

After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units. However, this does not mean that the condominium project, as a whole, can only have four units.
The townhouse exception: 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).

Eligible Improvements

Mortgage proceeds must be used in part for
rehabilitation and/or improvements to a property. There is a minimum
$5000.00 requirement for the eligible improvements on the existing
structure on the property. Minor or cosmetic repairs by themselves
are impracticable and unacceptable; however, they may be added to the
minimum requirement (in addition to $5,000). The mortgage must
include one or more of the items listed below, with a cumulative
minimum of $5,000.

A. Structural alterations and reconstruction (e.g., additions to the
structure, finished attics, repair of termite damage and the
treatment against termite infestation, etc.)

B. Changes for improved functions and modernization (e.g., remodeled
kitchens and bathrooms).

C. Elimination of health and safety hazards (including the
resolution of defective paint surfaces and/or lead-based paint
problems on homes built prior to 1978).

D. Changes for aesthetic appeal and elimination of obsolescence
(e.g., new exterior siding).

F. Reconditioning or replacement of plumbing (including connecting
to public water and/or sewer system), heating, air conditioning
and electrical systems.

F. Roofing, gutters and downspouts.

G. Flooring, tiling and carpeting.

H. Energy conservation improvements (e.g., new double pane windows,
insulation, solar domestic hot water systems, etc.).

I. Major landscape work and site improvement, patios and terraces
that improve the value of the property equal to the dollar amount
spent on the improvements or required to preserve the property
from erosion.

J. Improvements for accessibility to the Handicapped.

When basic improvements are involved, the following costs can be
included in addition to the minimum $5,000 requirement for the
existing structure:

- Construction or rehabilitation of a detached garage or an
attached unit(s) to the existing dwelling (if allowed by the
local zoning ordinances).

- New cooking ranges, refrigerators and other appurtenances
(Used appliances are not eligible).

- Interior or exterior painting.

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

Recently Acquired Properties

Homebuyers who purchase a property with cash can refinance the property using 203(k) within six (6) months of purchase, the same as if the buyer purchased the property with a 203(k) insured loan to begin with. Evidence of interim financing is not required; the mortgage calculations will be done the same as a purchase transaction. Cash back will be allowed to the borrower in this situation less any down payment and closing cost requirement for the 203(k) loan.

Mortgage Payment Reserve. Funds not to exceed the amount of six (6) mortgage payments (including the mortgage insurance premium) can be included in the cost of rehabilitation to assist a mortgagor when the property is not habitable during rehabilitation. The number of mortgage payments cannot exceed the completion time frame required in the Rehabilitation Loan Agreement.

Maximum Mortgage Calculation


Based on the lesser of:

1) The existing debt on the property before rehabilitation, plus the estimated cost of rehabilitation and allowable closing costs or

2) The lesser of the As-Is value plus rehabilitation costs or 110 percent of the After-Improved value multiplied by the appropriate LTV factor.

NOTE: If the property was owned less than one year, the acquisition cost plus the documented rehabilitation costs must be used.


The maximum mortgage amount is based on the lesser of 1) or 2) of the below multiplied by the appropriate LTV factor.

1) The As-is value or the purchase price of the property before rehabilitation, whichever is less, plus the estimated cost of rehabilitation or

2) 110 percent of the After-Improved value of the property.

Principal Residence (Owner-Occupant) & HUD Approved Non-Profit Organization. For purchases with 203(k) financing: the maximum mortgage amount is to be based upon the HUD estimate of value in 1) or 2) above, less the statutory investment requirement. For refinances under the 203(k) program: the maximum mortgage amount is to be based upon 97/95/90 percent of the HUD estimate of value in 1) or 2) above.

Cost of Rehabilitation

Expenses eligible to be included in the cost of rehabilitation are materials, labor, contingency reserve, overhead and construction profit, up to six (6) months of mortgage payments, plus expenses related to the rehabilitation such as permits, fees, inspection fees by a qualified home inspector, licenses and consultant and/or architectural/engineering fees. The cost of rehabilitation may also include the supplemental origination fee which the mortgagor is permitted to pay when the mortgage involves insurance of advances, and the discounts which the mortgagor will pay on that portion of the mortgage proceeds allocated to the rehabilitation.

Please email any questions.

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