The Section 203(k) Program is FHAs primary program for the rehabilitation and repair of single family properties. It has been a great tool for community and neighborhood revitalization. Many lenders have successfully used the program to help borrowers purchase and rehabilitate properties.
How it Works:
Typically when a homebuyer wants to purchase a home in need of repair or modernization, the buyer will normally need to obtain financing to purchase the dwelling; then additional financing for the repairs/construction; and finally a permanent mortgage when the work is complete to pay off the original loans involved.
With the FHA 203(k) program, the borrower can obtain a single long-term mortgage loan to finance both the acquisition and the rehabilitation of the property. In order to provide the funds the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work.
When the loan closes, the proceeds for the rehabilitation/improvement will be placed into an interest bearing escrow account insured by the FDIC or the NCUA. The lender will release these funds upon completion of the proposed rehabilitation in accordance with the Work Write-Up and the Draw Request.
Example: $20,000 in repairs is needed on a home where the purchase price is $200,000. The total mortgage amount would be $220,000. $200,000 goes to the actual sale, while the remaining $20,000 is placed into an escrow account and will be paid out once the work is complete.
The property must be a one to four-family dwelling that has been completed for at least one year. The number of units on the site must be acceptable to the provisions of local zoning requirements. All newly constructed units must be attached to the existing dwelling.
Homes that have been demolished or will be razed are eligible provided some of the existing foundation system remains.
The program can also be used to converts a one-family dwelling into a two, three, or four-family dwelling, and vice versa.
An existing home (modular unit) on another site may be moved to the mortgaged property.
The loan may be originated on a “mixed use” residential property and condominium units provide it meets certain requirements. Visit www.HUD.gov for more details.
All repairs/construction must comply with the following:
1. New construction must conform to local codes and HUD Minimum Property Standards
2. To improve the thermal efficiency of the dwelling, the following are required:
-Weather-strip all doors and windows
-Caulk or seal all openings, cracks or joints.
-Insulate all openings in exterior walls where the cavity has been exposed.
-Insulate ceiling areas where needed.
3. Replacement Systems
-Heating, ventilating, and air conditioning system supply and return pipes and ducts must be insulated whenever they run through unconditioned spaces.
-Heating systems, burners, and air conditioning systems must be sized to be no greater than 15% oversized for the critical design, heating or cooling, except to satisfy the manufacturer’s next closest nominal size.
4. Each sleeping area must be provided with a minimum of 1 approved, listed and labeled smoke detector installed adjacent to the sleeping area.
Luxury items and non-permanent improvements are not eligible. However the program may be used for such things as painting, room additions, decks and other items even if the home does not need any other improvements.
The homebuyer must provide the lender with the appropriate architectural exhibits that clearly show the scope of the work to be completed.
The flowing are recommended exhibits, but may be modified by the local HUD Field Office:
-A plot Plan of the site is required only if a new addition is being made.
-Proposed Interior Plan of the Dwelling shows where structural or planning changes are contemplated.
-Work Write-up and Cost Estimate. Any format may be used, but the quantity and cost of each item must be shown. Cost estimates must include labor and materials sufficient to complete the work by a contractor.
Should you have any questions or need further information,
please don’t hesitate to contact me, (775) 220-1630
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