Section 203(k) fills a unique and important need for home buyers. When buying a house that needs repair or modernization, home buyers 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. The solution? An FHA 203(k) Rehab Loans allows home buyers 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.
The 203(k) program is also a tool for FHA-approved lenders to originate loans for individuals, nonprofits and government development agencies interested in purchasing foreclosed properties in need of repair. Compared to conventional purchase and rehab loans, the 203(k) loans carry less risk to lenders since these loans are backed by the full faith and credit of the federal government. With an insured loan, the lender doesn’t have to worry if the current condition and value of the property offer adequate security.
Who is Eligible?
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.
Other Guidelines?
Home must be at least one year old
The cost of the repairs must be at least $5000
The value of the property must fall within the FHA mortgage limit for that area
The program can be used to repair/rehab one-to-four unit dwellings
To purchase a HUD owned property with a 203(k) loan, the property must be advertised that it is eligible for financing with a 203(k) loan
Real estate investors are not eligible to take out 203(k) loans
Can be used to move an existing home onto another site
Can be used to convert or modify access for a disabled person
The work write-up to estimate cost of repairs is required to be completed by a HUD-approved 203(k) consultant.
Eligible Repairs/Renovations?
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.
Is there a time period on the rehabilitation construction period?
Yes, the Rehabilitation Loan Agreement contains three provisions concerning the timeliness of the work. The work must begin within 30 days of execution of the Agreement. The work must not cease prior to completion for more than 30 consecutive days. The work is to be completed within the time period shown in the Agreement (not to exceed six months); the lender should not allow a time period longer than that required to complete the work.
What happens if the cost of the rehabilitation increases during the rehabilitation period?
Can the 203(k) mortgage amount be increased to cover the additional expenses? No. This emphasizes the importance of carefully selecting a contractor who will accurately estimate the cost of the improvements and satisfactorily complete the rehabilitation at or below the estimate.
How long will it take after the sales contract is signed to go to closing?
If the cost estimates are completed within two weeks of signing the sales contract, the loan should close within 60 to 90 days, assuming there are no title problems and, of course, your borrower is qualified.
What is the Streamlined 203(k) Limited Repair Program?
FHA's Streamlined 203(k) program permits homebuyers to finance up to an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this new product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser. There is no minimum repair cost threshold.
What is an SFR?
The complex details involved with short sales and foreclosures are unique calls for specialized expertise. Contact an agent such as myself that has earned the Short Sale and Foreclosure Resource (SFR) Certification through the National Association of Realtors and who is committed to guiding you through the process, setting realistic expectations, and streamlining your path to homeownership. Call me anytime at (910) 787-2160 to set up a free, personal consultation.
If you are considering buying a short sale or foreclosure, there could be drawbacks that I, as a real estate agent, cannot advise you on. For your protection, I suggest that all borrowers:
Obtain legal advice from a competent real estate lawyer to discuss title issues, changes to land use, sellers right to redemption and a host of other issues.
Call an accountant or CPA to discuss short sale and foreclosure tax ramifications
