Most mortgages provide only permanent financing. It is when the lender will notcclose the loan and releases the mortgage proceeds, unless the condition and value of the property provide adequate loan security. When homebuyers want to
purchase a house in need of repair, they should obtain interim financing to purchase the dwelling and perform the rehabilitation; and then permanent financing when the work is completed. Often the interim financing like the the acquisition and construction loans, involves relatively high interest rates and short amortization periods.
The Section 203(k) program was designed to address the situation sited above. The borrower can get just one mortgage loan, at a long-term fixed or adjustable rate, to finance both the acquisition and the rehabilitation of the property. At
loan closing, mortgage proceeds are used to pay the seller to acquire the property. An escrow account is established to finance the rehabilitation. The loan is eligible for FHA mortgage insurance following closing, before the rehabilitation has been completed. Section 203(k) may also be used to refinance existing indebtedness and finance rehabilitation.
A Section 203(k) mortgage must involve a minimum of $5,000 in eligible repairs. There is no maximum amount of repairs, but the total loan amount which includes acquisition cost or refinanced debt plus rehabilitation, cannot exceed FHA's
maximum mortgage limits for the county in which the property is located. The as-repaired value of the property will also limit the allowable mortgage amount. A prospective borrower starts the process by identifying the property to be acquired or refinanced, and applies to a HUD-approved mortgage lender. The lender will assign a Section 203(k) consultant to perform an inspection of the property and to develop a detailed work write-up and cost estimate. The work write-up must include any items required to meet HUD's Minimum Property Requirements, plus other improvements or work requested by the borrower.
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