Anybody who's lived through a remodel knows how difficult that can be. HUD's 203(k) offers a way to buy a property and have the remodeling finished before you even move in. The Section 203(k) program is the Department's primary program to rehabilitate and repair homes. It is an important tool to revitalize communities and neighborhoods. It also increases home ownership opportunities. Since these are the primary goals of HUD, the Department continues to strongly support Section 203(k) and the lenders that participate in it.
The Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD), administers various residential mortgage insurance programs. These programs operate through FHA-approved lenders. An application is submitted to have the property appraised and the buyer's credit approved. The lenders fund the mortgage loans and HUD insures them. HUD does not make direct loans to help people buy homes.
How is 203(k) Different?
Most mortgage financing plans provide only permanent financing. The lender typically will not close a loan nor release the mortgage proceeds unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, a lender customarily requires the improvements to be finished before a long-term mortgage will be made.
If a home buyer wishes to purchase a house in need of repair or modernization, there are usually a few steps involved. First, the borrower must obtain financing to purchase just the property. Next, they need to secure additional financing for the rehabilitation construction. Often times this interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods. Therefore, once the work is completed, many home owners then need to refinance the interim loan into their mortgage to gain more favorable terms.
The Section 203(k) program was designed to simplify this situation. The home buyer can get just one mortgage loan, at a long-term rate, to finance both the acquisition and the rehabilitation. The mortgage loan is based on the projected value of the property once the work is completed, including the cost of the work. This mortgage amount provides the funds needed for the rehabilitation. Furthermore, to minimize the risk to the lender, the mortgage loan is eligible for endorsement by HUD. Once the mortgage funds are disbursed and a rehabilitation escrow account is established, the lender will have a fully-insured mortgage loan.
Eligibility Requirements
To qualify, the home must be a one- to four-family dwelling that has been completed for one year or more. The number of units on the site must be in accordance with the local zoning provisions. Any newly constructed units must be attached to the existing dwelling. Cooperative units are not permitted.
Homes that have been demolished, or scheduled to do so for the rehabilitation work, are eligible. Some of the existing foundation system must remain in place for them to qualify.
Conversions from one-family dwellings to two-, three-, or four-family dwellings are eligible. An existing multi-unit dwelling could also be decreased to a one- to four-family unit.
An existing house (or modular unit) on another site is eligible if moved onto the mortgaged property. However, the loan funds for the existing structure on the non-mortgaged site will not be released until the new property has been properly inspected and the unit has been properly placed and secured to the new foundation.
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