The FHA 203(k) Rehab Loan

The Federal Housing Administration’s 203(k) program is a purchase or refinance rehabilitation loan. This loan program allows a borrower with limited funds to purchase, or refinance, and fix up a one-to four-unit property. Although it must be owner-occupied, a portion of the property can be for commercial use. As long as part of the existing foundation remains in place, properties which are demolished (or scheduled to be as part of the rehabilitation) are eligible. Improvements made under this program may be significant or minor, but a minimum of $5,000 in improvements must be made, and they must fall within certain categories. Additionally, there is no upfront Mortgage Insurance Premium (MIP) charged on 203(k) loans.

Some repairs which are mandatory:

• Thermal protection
• Smoke detectors
• Wood-boring pest
• Moisture damage
• Septic
• Well or water service
• Elimination of health and safety hazards.

Other eligible repairs or improvements to meet the first $5,000 minimum requirement include modernization and functional changes; reconditioning or replacement of plumbing, heating, air conditioning and electrical systems; aesthetic upgrades and the elimination of obsolescence; roofing, guttering, and downspouts; damaged flooring; and energy conservation upgrades. Beyond these, virtually any other improvements can be made, such as purchasing new appliances or repairing a pool.

FHA provides rehabilitation loans for owner-occupants of real estate to:

• finance the rehabilitation of an existing property;
• finance rehabilitation and refinancing of the outstanding indebtedness (mortgages) of a property; and
• Finance the initial purchase and rehabilitation of a property.

The FHA 203(k) can be used with 1-4 family dwellings, condominiums and HUD Homes. There is a minimum requirement of $5,000 in repairs. Unfortunately, Co-ops are not eligible.

FHA 203(k) can be used to bring illegal dwellings into code compliance. Mixed use residential / commercial properties may also be eligible. A burnt out shell, incomplete shell or empty foundation is eligible for 203(k) financing provided it is over 1 year old.

FHA will lend up to 98.15% of the future value of the dwelling after all completed repairs but you cannot exceed the maximum FHA loan limit for the area in which the property is located in.