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)
fills a unique and important need for homebuyers. When buying a house that needs
repair or modernization, homebuyers usually have to follow a complicated and costly
process. The interim acquisition and improvement loans often have relatively high
interest rates, short repayment terms and a balloon payment. 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. They also protect the lender by allowing them to have the loan
insured even before the condition and value of the property may offer adequate
security.
For less extensive repairs/improvements, see Streamlined
203(k). 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.
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.
Application:
Applications must be
submitted through an FHA approved lender.
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. For more information contact the FHA
Resource Center.
For More Information:
A brochure, Rehab
a Home with HUD's 203(k), is available online. A set of questions
and answers about 203(k) loans is also available.