Home Rehab Loans (Section 203k)
For home rehab activities that do not also require
buying or refinancing the property, borrowers may also consider
a Title I Home Improvement
Section 203k Home Rehab Loans (also called home
rehabilitation loans or mortgages) are loans made by private lenders
that are insured by the Federal Housing Administration (FHA), part
of the U.S. Department of Housing and Urban Development (HUD).
Through a single rehab mortgage, you can:
- Purchase or refinance a home
- Include the cost of making repairs or improvements
- Include allowable closing costs
You can obtain a rehab loan as a 15- or 30-year fixed-rate mortgage
or as an adjustable-rate mortgage (ARM) from a HUD-approved lender,
and the loan down payment requirement is approximately 3% of the
home acquisition and repair costs. The amount of the loan may include
a contingency reserve of 10% to 20% of the total remodeling costs,
used to cover any extra work not included in the original proposal.
The total amount of your mortgage will be based on the projected
value of your home after the renovation is completed, taking into
account the cost of the work. A portion of your loan is used to
pay for the purchase of the home, or in the case of a refinance,
to pay off any existing debt. The remainder is placed in an interest-bearing
escrow account on your behalf and released in stages as rehab
FHA requires that you use a minimum of $5,000 toward eligible
repairs or improvements and that you complete the repairs within
six months after the loan’s closing depending on the extent
of work to be completed. This first $5,000 primarily covers eliminating
building code violations, modernizing, or making health and safety-related
upgrades to the home or its garage. You may add minor or cosmetic
repairs after this requirement is satisfied, if applicable. You
cannot include improvements for commercial use or luxury items,
such as tennis courts, gazebos, or new swimming pools.
If you are not planning to live in the home during construction,
you may finance up to six months of mortgage payments during the
renovation period. In addition, you may act as your own general
contractor or do the actual repair work yourself, if you are qualified.
Any money you save this way can be used for cost overruns or additional
improvements. You can be reimbursed only for actual material costs,
not for your own labor.
Homes must be at least a year old, and the total value of the
property must fall within the
FHA mortgage limit for the area.
The FHA maximum loan limit for the area may be exceeded by the
cost of energy efficient improvements, and the mortgage is eligible
for an increase of up to 20 percent in the maximum insurable mortgage
amount if such an increase is necessary for the installation of
solar energy equipment. However, the entire mortgage cannot exceed
110 percent of the value of the property. The value of the property
is determined by either (1) the value of the property before rehab
plus the cost of rehab, or (2) 110 percent of the appraised
value of the property after rehab, whichever is less.
Section 203(k) rehab loans are provided through FHA-approved
mortgage lenders nationwide, which include many banks, savings
and loan associations, credit unions, and mortgage companies.
Unlike other FHA single-family mortgages, Section 203(k) borrowers
do not pay an upfront mortgage premium. However, lenders may
charge some additional fees, such as a supplemental origination
fee, fees to cover the preparation of architectural documents
and review of the rehab plan, and a higher appraisal
Rehab Loans: Saving Time and Money
Most mortgage financing plans provide only permanent financing.
That is, the lender will not usually close the loan and release
the mortgage proceeds unless the condition and value of the property
provide adequate loan security. As a result, the purchase of a
house that needs repair is often a catch-22 situation, because
the bank will not provide a long-term mortgage to buy the house
until the repairs are complete, and the repairs cannot be done
until the house has been purchased.
In such situations, homebuyers usually have to follow a complicated
and costly process, first obtaining financing to purchase the property,
then getting additional financing for the rehab work,
and finally finding a permanent mortgage after rehab is
completed to pay off the interim loans. The interim acquisition
and improvement loans often have relatively high interest rates
and short repayment terms.
A Section 203(k) rehab loan, however, lets the borrower get just
one mortgage loan, at a long-term fixed (or adjustable) rate, to
finance both the acquisition and the rehab of the property. Section
203(k) insured loans save borrowers time and money, and also protect
lenders by allowing them to have the loan insured even before the
condition and value of the property may offer adequate security.
The information provided in this website is
not legal advice and should not be interpreted as legal advice.
This website is intended to provide a basic understanding of this
information in summary form. This information may not be comprehensive,
is subject to change, and may not apply to all individual circumstances.
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government agencies or with an attorney, particularly as it relates
to your individual circumstances. Your use of this website indicates
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