Overview:

The FHA insurance program of Section 203 (k) allows homebuyers and homeowners to finance both the purchase (or refinance) a home and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of existing housing.

Purpose of 203(k):

The 203k program is one of many programs offered by the FHA, which insures home loans, thus encourages lenders to provide mortgage credit to borrowers that would not qualify in other circumstance for loans conventional economic terms (such as home buyers first time) and residents of depressed areas (to where it can be difficult to get a mortgage).

The 203k mortgage satisfies a unique and important need for homebuyers in another way as well. If a potential borrower wants to buy a home that may need rehabilitation or repair, the buyer generally must follow a rigorous and costly process, first obtaining financing to obtain (purchase) the home, and then getting additional financing for the rehabilitation work finally find a permanent mortgage when work is completed to pay for temporary loans. Generally, the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amount of months to pay the loan back. However, the 203k program offers a solution that helps both borrowers and lending institution, ensuring a single loan at a fixed (or adjustable) interest rate in the long term to finance both the acquisition and rehabilitation of a property. The 203k insured loans save borrower's time and money, and also protects lenders, allowing them to have the loan insured even before the condition and value of the property may offer proper security. In 1996 alone, FHA settled insurance approvals for 17,000 homes; the estimated number of homes estimated to be insured under the 203k FHA program for the year of 1997 is 19,000, and 15,000 for 1998. For housing rehabilitation activities that do not require the purchase or refinancing of the property, borrowers may also consider HUD program.

Type of Assistance:

The program of Section 203 (k) insures mortgages covering the purchase or refinancing and rehabilitation of housing, with at least one year of construction. A portion of the loan is used to pay the seller, or if a refinance, to pay the mortgage. The remaining funds are placed in an account in custody and released when the rehabilitation work has been completed. The cost of rehabilitation must be at least $ 5,000, but the total value of the property must still remain within the FHA mortgage limit for that zone. The property value is determined by (1) the value of the property before rehabilitation plus the cost of rehabilitation, (or 2) 110 percent of the appraised value of the property after rehabilitation, whichever is less. The property value is determined by (1) the appraised value prior to repairs plus the cost of rehabilitation, (or 2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.

Many of the regulations and restrictions that make a commodity FHA mortgage insurance for single family dwelling (Section 203b, and relatively suitable for low-income borrowers apply here. But, some lenders may charge additional fees, such as supplemental origination fee, fees to cover the cost of additional architectural documents and review of the repair plan, as well as higher appraisal fees. However, unlike other FHA insured mortgages for houses, borrowers under the 203k program do not pay a mortgage advance premium.

Eligible Borrowers:

Lenders approved by FHA, which include many banks, savings and loan associations and mortgage companies can make loans covered by insurance 203k and 203b.

Eligible Customers:

Everyone who can be approved for a normal FHA loan can also apply for a 203k mortgage. Cooperative units are not eligible, individual condominium units may be insured if located in projects approved by the FHA or the Department of Veterans Affairs, or meet certain criteria of Fannie Mae.

Eligible Actions:

The limit of rehabilitation covered by insurance, Section 203 (k) can range from relatively minor or surface reconstruction (as long as cost are over $ 5000) to virtually a total reconstruction: a home that has been demolished or will be flattened as part of rehabilitation is eligible, for example, provided that existing systems of the foundations remain in place. Insured loans under the program 203k can finance the rehabilitation of the residential part of a property, which also has non-residential use; also cover the refurbishment of a property of any size to a structure of one to four units.

The types of improvements that borrowers may make when using the program funding under Section 203 (k) include:

• Reconstruction and structural improvements.

• Changes for improved functions and modernization.

• Elimination of hazards to health and safety.

• Changes to improve appearance and elimination of obsolescence.

• Reconditioning or replacing plumbing, installation of well and / or septic system.

• Additions or replacement of roofs, gutters, and drains.

• Additions or replacement of floors and / or treatment of floors.

• Major landscape work and site improvements.

• Access improvements for people with disabilities.

• Improvements to energy conservation.

HUD requires that all properties financed under this program meet certain basic standards and structural efficiency. However, are not eligible for a 203k loan, luxurious amenities, and improvements that do not form a permanent part of a property.