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.