The FHA 203K loan program is the Federal Housing Administration (FHA) Departments primary program for the rehabilitation and repair of single family properties. Basically, it is a home improvement loan.
How the Program Can Be Used:
This program can be used to accomplish rehabilitation and/or improvement of an existing one-to-four unit dwelling in one of three ways:
To purchase a dwelling and the land on which the dwelling is located and rehabilitate it.
To purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehabilitate it.
To refinance existing indebtedness and rehabilitate a dwelling.
To purchase a dwelling and the land on which the dwelling is located and rehabilitate it, and to refinance existing indebtedness and rehabilitate such a dwelling, the mortgage must be a first lien on the property and the loan proceeds (other than rehabilitation funds) must be available before the rehabilitation begins.
To purchase a dwelling on another site, move it onto a new foundation and rehabilitate it, the mortgage must be a first lien on the property; however, loan proceeds for the moving of the house cannot be made available until the unit is attached to the new foundation.
FHA 203K Loan Eligible Property:
To be eligible for the FHA 203K mortgage loan, the property must be a one-to-four family dwelling that has been completed for at least one year. The number of units on the site must be acceptable according to local zoning requirements. All newly constructed units must be attached to the existing dwelling. Cooperative units are not eligible.
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 improvement loan projects, the FHA 203K mortgage loan 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.
An existing house (or modular unit) on another site can be moved onto a mortgaged property; however, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation.
A 203K mortgage loan may be originated on a mixed use residential property provided:
1) The property has not greater than 25 percent (for a one story building), 49 percent (for a two story building; and 33 percent (for
a three story building) of its floor area used for commercial (storefront) purposes;
2) The commercial use will not affect the health and safety of the occupants of the residential property;
3) The rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential
party of the property.
Minimum amount of repairs required on a FHA 203K home improvement loan
There is a minimum of $5,000 requirement of eligible home improvement loan projects on the existing structure of the property. Minor or cosmetic repairs may be included after meeting the first $5,000 worth of repairs.
Qualified repairs for first $5,000
Structural alterations and reconstruction: (Repair or replacement of structural damage, chimney repair, additions to the structure, installation of additional bath(s), skylights, finished attics and/or basements, repair of termite damage and the treatment against termites)
1) Elimination of health and safety hazards.
2) Changes for aesthetic appeal. (New siding, adding a dormer, covered porch, attached garage.
3) Air Conditioning or replacement. (Plumbing, heating, air conditioning and electrical systems.)
4) Installation of well, septic system or connection to public utilities.
5) Roofing, gutter downspouts, flooring, tiling and carpeting.
6) Major landscape and site improvement
7) Improvements to improve accessibility and functions for the disabled.
What are the qualifications to be able to obtain a FHA 203K loan?
The qualification requirements are the same as a typical FHA mortgage loan. The only additional item that the borrower needs is either enough cash reserved to pay for materials and labor until they are reimbursed
through a draw or a credit card with an adequate available balance. If there is to be a contractor involved,
the contractor may choose to cover these costs.
The interest rate on a typical FHA 203K mortgage loan is a little higher than a standard FHA or conventional
30/15 year fixed-rate loan. The cash requirements are the same, 3 to 5 percent, which is less than a typical
conventional loan. There are a couple of additional fees which pertain to the construction aspects of the FHA 203K loan.
Choose your own contractor
You may decide on your own contractor, and they should be brought into the process in the beginning stage
of the loan process. Check out the credentials of the contractor thoroughly, making sure he is knowledgeable in all aspects of rehabilitation work.
The home improvements or repairs need not be made before moving into the property, depending on how
extensive the repairs are and whether the house is habitable while the repairs are being made. The home
improvement loan provides the ability to include up to 6 months of mortgage payments in the improvement
escrow, should you not be able to occupy the property and have to pay rent during rehabilitation.