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FHA 203(k) Program – What It Is, What It Does and What It Means to You!

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Mortgage and Lending with Apex Home Loans NMLS #369577

Are you looking to purchase a home? If you want to get the most bang for your buck with the glut of fixer uppers on the market, I suggest you understand the 203K loan.

Original content by Dee Bundy

 

House RepairThe Federal Housing Administration (FHA) administers various single family mortgage insurance programs, including a few that provide for the rehabilitation and repair of single family properties such as the 203k and Streamlined 203k program (to be covered next week). As the Departments primary rehabilitation program, the Section 203(k) program is a tool for revitalizing neighborhoods hard hit by today's tough economic times and high foreclosure rates.

How the 203(k) Works

Most mortgage plans provide financing where the current condition and value of the property provides adequate loan security (loan equal or less than current value). Homes in need of repair or modernization require a homebuyer to obtain financing to purchase, plus additional financing for the construction and then a permanent mortgage once repairs are finished. The interim loans often carry high interest rates and short amortization periods, leaving the homebuyer with a much higher cost.

In contrast, the 203(k) allows the borrower to secure a loan equal to the current value PLUS a reasonable addition for rehabilitation by appraising the homes project value after repairs.

Eligible Property

Eligible properties must be a 1- to 4-family dwelling that is at least one full year old, fits local zoning requirements and not a 'cooperative' unit. Demolished homes (or those to be demolished) are eligible if the existing foundation system remains in place. Single family dwellings can also be converted to additional family units or vice-versa. Additional property eligibility can be determined through your local FHA approved lender.

How the Program Can Be Used

  • To purchase a dwelling and the land on which the dwelling is located and rehabilitate it.
  • To purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehabilitate it.
  • To refinance existing liens secured against the subject property and rehabilitate the dwelling.

Eligible Improvements

New DeckHomeowners can use the 203(k) program to finance most 'non-Luxury' items/improvements such as room additions, decks, painting, carpet, etc. Health, safety and energy conservation improvements must be done prior to completing general home improvements. Required energy improvements include weatherstripping, reducing air infiltration (caulk/seal openings), insulation, HVAC pipe and duct insulation, attic and crawl space ventilation and any additional requirements per 24 CFR Part 39 and 200.926d. All room additions must meet HUD's new construction requirements.

Maximum Mortgage Amount

The mortgage amount (plus any existing debt against the property) cannot exceed the maximum dollar amount limitations and applicable loan-to-value ratio prescribed for similar properties. The maximum dollar amount is the lesser of:

  1. The As-is value or purchase price before rehabbing (whichever is less) plus the estimated cost of rehabilitation
  2. 110% of the After-Improved value of the property

In addition, the repair or rehabilitation escrow amount cannot exceed $35,000. (Update: This limitation is for the Streamlined 203k, which I'll cover in a future post.)

I hope this helps provide a little insight into this helpful program. Additional information can always be found at the FHA website.

If you have any questions on how the 203(k) program works, please feel free to leave me a comment below!

Brought to you by:

Danielle "Dee" Baldwin

 

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Brought to you by:

Danielle "Dee" Baldwin
Infinity Group Realty

www.Dee-Baldwin.com

Infinity Group Realty

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Comments (1)

John Pusa
Glendale, CA

Lewis - Excellent information and tips on FHA 203-K program. Thank you for sharing a very good blog.

Oct 15, 2010 05:02 PM