Rehabilitation Mortgage Insurance (Section 203(k))

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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) is one of many FHA programs that insure mortgage loans - - and thus encourage lenders to make mortgage credit available to borrowers who would not otherwise qualify for conventional loans on affordable terms (such as first - time homebuyers) and to residents of disadvantaged neighborhoods (where mortgages may be hard to get).

Section 203(k) fills a unique and important need for homebuyers in another way as well. When buying a house that is need of repair or modernization, homebuyers usually have to follow a complicated and costly process, first obtaining financing to purchase the property, then getting additional financing for the rehabilitation work, and finally finding a permanent mortgage after rehabilitation is completed to pay off the interim loans. The interim acquisition and improvement loans often have relatively high interest rates and short repayment terms. 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, and also protect lenders by allowing them to have the loan insured even before the condition and value of the property may offer adequate security. Insurance commitments for 17,000 homes were made in FY 1996; the estimated number of homes to be insured under Section 203(k) for FY 1997 is 19,000, and 15,000 for FY 1998. 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. However, unlike other FHA single - family mortgages, Section 203(k) borrowers do not pay an upfront mortgage premium.

Eligible Grantees:
FHA - approved lending institutions - which include many banks, savings and loan associations, and mortgage companies - can make loans covered by Section 203(k) insurance.

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. However, luxury items and improvements that do not become a permanent part of the property are not eligible uses of a 203(k) loan.

Application:
Applications must be submitted to the local HUD Field Office through an FHA - approved lending institution. HUD's website offers an interactive directory of approved lenders.

Technical Guidance:
Insurance for rehabilitation is authorized under Section 203(k) of the National Housing Act (12 U.S.C. 1709(4k)). Program regulations are at 24 CFR 203.50. This and other FHA programs are administered by the Office of Single - Family Housing in HUD's Office of Housing - Federal Housing Administration. Contact the Director of Single - Family Housing at the nearest HUD field office.

For More Information:
A handbook, Rehab a Home with HUD's 203(k), is available at HUD's website or by mail from HUD. A set of questions and answers about 203(k) loans is also available.