The U.S. Department of Housing and Urban Development (HUD) offers the Section 203(k) rehabilitation mortgage insurance program that allows homeowners and homebuyers to obtain financial assistance in purchasing, refinancing or rehabilitating their homes.
The 203(k) rehabilitation mortgage insurance
In purchasing a home that requires repairs or modifications, homebuyers often have to adhere to expensive and complicated processes. Customarily, home improvement loans have relatively high interest rates and brief repayment terms.
The purpose of this mortgage insurance program is to provide solutions to help borrowers and lenders by insuring a fixed or adjustable long-term rate loans that covers a home’s purchase and rehabilitation. This program also saves borrowers an amount of cash and time because of the insured loans. Section 203(k) also safeguards lenders by enabling them to have insured loans even before the property’s value and condition provide enough security.
Type of assistance
Section 203(k) requires that the property is at least a year old for it to insure mortgages that cover the acquisition or rehabilitation of a home. A piece of the loan proceeds go to pay the seller to fill the bill of an existing mortgage. The remaining funds are directed to an escrow account and issued when the rehabilitation is completed. Rehabilitation costs at least $5,000 to qualify. However, the property’s total value must be in range within the Federal Housing Administration (FHA’s) area mortgage limit.
The property’s value is determined by:
- Property’s value prior rehabilitation and rehabilitation costs
- 110 percent of the property’s appraised value after rehabilitation
Lenders usually impose additional charges to cover supplemental origination, preparation of documents, review of rehabilitation plans and appraisals.
The level of the rehabilitation under Section 203(k) may range from minor to virtual reconstruction (minor repairs must exceed $5,000 in costs). A property is also qualified provided it has been demolished or will be bulldozed as part of the rehabilitation and that the existing foundation is still intact.
Section 203(k) insured loans can also fund the rehabilitation of residential parts of a property that has a non-residential value.These loans can also cover property size conversions to a one- to four-unit construction.
Using Section 203(k), borrowers can make these types of improvements/upgrades:
- Alterations and reconstruction of the remaining structure
- Modernization and home function improvements
- Removal of health and safety hazards
- Improvement of physical appearance
- Elimination of obsolescence
- Replacement or reconditioning of plumbing
- Installation of water and waste management systems
- Replacement or addition of roofs, gutters and downspouts
- Replacement or upgrade of flooring; adding floor treatments
- Improvement of site and landscape features
- Addition of handicap-accessible construction
- Addition of high energy efficiency improvements
HUD mandates that properties or homes financed under Section 203(k) must follow basic energy efficiency and building standards.
Loan applications must be directly submitted to an FHA-approved lender. Lenders choose an FHA-approved consultant, who produces a description of work needed to improve the property. Then, an appraiser establishes the repaired value of the property.
Eligible applicants must also demonstrate the capability of meeting and repaying their loans. The FHA Resource Center can provide you with answers to your mortgage and loan products as well as your home improvement and rehabilitation questions.