The Section 203(k) Rehab Mortgage Loan may not be familiar to many. This is one of the HUD-loan programs for homebuyers and homeowners who have home improvement renovations in mind.
FHA makes home buying (or refinancing) and rehabilitation easier by compacting these two into one loan.
This particular rehab loan allows the purchase – or refinance – and repair of a home that is at least one year old. The property must be a principal residence of a borrowing individual. Cooperative and Investment properties, therefore, are not qualified for this loan.
What home repairs are allowed?
It can be used towards homes that have one to four units where one has to be the primary residence of a borrower. This can also be used towards condominium units and mixed residential properties that have commercial spaces. It should be emphasized that there are certain restrictions that apply for these type of residential spaces.
If you would wish to knock down some walls to join some units in a multi-unit dwelling or add more walls to create 4 livable units , the Section 203(k) can also be used for this purpose. It should be noted, however, that not all types of improvements are allowed. Those that are considered luxury improvements, like adding a swimming pool or building a fountain on your lawn, is not allowed in this type of loan.
The uses are not restricted to those mentioned above. Even cosmetic improvements are allowed. A minimum amount of $50,000 should go to qualified renovations that must be done in a span of 6 months. A small portion can then be added for aesthetic renovations, so long as it is allowed.
You can consult an approved counselor and look for approved lenders to help you determine if your renovation plan qualifies for the program.
How do things work?
Looking for a loan to purchase a home that needs improvements is, more often than not, difficult to find. While there may be a lot of loans available in the market, the difficulty lies in the process of obtaining the loan as it may be complicated and expensive.
The Section 203(k), however, insures borrowers for a single, long term loan that covers both purchase and rehabilitation. The loan can be taken out as a fixed-rate mortgage or an adjustable rate mortgage.
This can be an advantage for low- to middle-income borrowers because the down payment can go as low as 3 percent of the loanable amount. The loanable amount is determined from the projected value of the home after the completion of the rehab work, considering the total cost of the renovation. A determined portion would go to towards paying for the home purchase or paying off existing debts. The rest will be placed in an escrow account where the fund is disbursed upon completion of the repair and improvements.
$50,000 is too big of an amount?
If you think that the cost of repair is lesser than the minimum amount required mentioned above, you may consider the Limited 203(k) loan. This is intended for loans that need less work and repairs. It requires a lesser amount of $35,000 to go to repairs, remodeling and improvements. Learn more about it by visiting the HUD portal.
This loan, just like any other FHA loan, is a government-guaranteed loan. It is highly suggested that you shop for FHA-approved lenders. FHA may have standard requirements for these loans but lenders may overlay as an added guideline. Also, different lenders may offer you different down payment and interest rates. Do not hesitate to ask as many essential questions as needed. To help you do your research, FHA.co has more articles you can read to help you on your journey. We can also get you matched with a lender with zero obligations.