FHA 203(k) Rehab Program

A unique FHA-insured loan is now available to cover the cost for homebuyers to rehab houses in need of repair or modernization. In the past, when rehab was necessary, the lender typically required the repairs to have been finished before the long-term mortgage was arranged. This meant a homebuyer wanting to purchase a home in need of rehab would have to obtain two phases of financing: one to purchase the property, and a second to do the necessary construction. With this new loan, a borrower can get a single mortgage at a long-term fixed (or adjustable) rate to finance both the acquisition and rehabilitation of the property.

The mortgage amount is based on the projected value of the property after completion of the rehab, factoring in the cost of the repairs. Eligible properties are one- to four-family dwellings that have been completed for at least one year. The number of the site's units must be acceptable under local zoning provisions. All newly constructed units must be attached to the existing dwelling, and co-op units are not eligible.

The program can be used to accomplish the rehab and/or improvement of an existing one- to four-unit dwelling in one of three ways:

1. For the purchase of a dwelling and the land on which the dwelling is located and to rehab it.

2. To purchase a dwelling on another site, move it onto a new foundation on the mortgaged property, and rehab it.

3. To refinance existing liens secured against the property in question and rehab the dwelling on that property.

Luxury items and improvements are not eligible as a rehab cost. The funds can, however, be used for such projects as painting, room additions, decks, and other items, even if the home is not in need of any other improvements. All health, safety, and energy conservation items must be addressed prior to completing general home improvements. 

What the Loan Covers

• Repair/replacement/upgrade of roofs, gutters, HVAC systems, plumbing, electrical

• Flooring repair or replacement

• Remodeling of kitchen or bathroom(s)

• Painting - interior and exterior

• Purchase and installation of appliances

• Accessibility improvements for people with disabilities

• Basement finishing or remodeling

• Window and door replacements

• Septic system and/or well repair or replacement

• Repair to existing swimming pool (up to $1500)

• Up to 6 months' PITI mortgage payments

• Permit costs

• Energy conservation improvements

• The contract is written for the sale price of the home, stating that the buyer is seeking an FHA 203(k) loan, with the contract contingent upon loan approval for required or desired repairs.

• The homebuyer selects an FHA-approved 203(k) lender and arranges for a detailed proposal of the work to be done, including a cost estimate of each repair or improvement.

• An appraisal is performed to determine the post-renovation value of the property.

• Once the borrower passes the lender’s creditworthiness test, the loan closes for an amount that covers the purchase or refinance cost of the property, remodeling costs, and allowable closing costs.

• At closing, the seller is paid off and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehab.

• Mortgage payments and remodeling begin after the loan closes. The borrower can opt to have up to six mortgage payments (PITI) put into the cost of the rehab if the property will not be occupied during construction, but the time cannot exceed the time estimate for completion of the rehab project.

• Escrow funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of the job, 10 percent of each draw is held back, to be paid after the lender determines there will be no liens on the property.

For more information about the FHA 203(k) Rehab Program, call  Broker Anna "Banana" Kruchten at 602-595-8900. Also visit http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm for more details.