203k Loan Program

The Section 203k program is the Federal Housing Administration's (FHA) rehabilitation program. The FHA is part of the Department of Urban Development (HUD) which administers various single family mortgage insurance programs. The 203k program is an important tool for revitalizing communities and expanding neighborhood home ownership opportunities.

Most lenders provide only permanent financing. Lenders typically do not close loans and release the mortgage proceeds until the condition and value of the property provide adequate loan security. When rehabilitation and / or repair is involved, the lender usually requires the improvements to be completed prior to the mortgage proceeds being distributed.

When a home buyer wants to purchase a house in need of repair or modernization, the home buyer usually has to obtain financing first to purchase the home. Additional financing is needed to do the rehabilitation construction and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively unattractive high interest rates and short amortization periods. The Section 203k program was designed to address this situation and provide home buyers with better financing options for rehabilitation loans. Borrowers can get one mortgage loan, at a long-term fixed or adjustable rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation of the home, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. To minimize the risk to the mortgage lender, the mortgage loan is eligible for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At this point the lender has a fully-insured mortgage loan.

For properties to be eligible for the 203k program, they 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 according to the provisions of local zoning requirements. All newly constructed units must be attached to the existing dwelling.

Cooperative units are not eligible for this program. Homes that have been demolished or will be razed as part of the rehabilitation work are eligible provided some portion of the existing foundation system remains in tact.

In addition to typical home rehabilitation projects, this program can be also used to convert a one family dwelling to a two, three or four family dwelling. Conversely, an existing multi-unit dwelling could be decreased to a one to four family unit dwelling.

An existing house or modular unit in a different location can be moved onto the mortgaged property; however, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation.

A 203k mortgage may be originated on a mixed use residential property provided the following items are met:

– The property has no greater than 25% for a one story building; 33% for a three story building; and 49% for a two story building of its floor area used for commercial (storefront) purposes.

– The commercial use will not affect the health and safety of the occupants of the residential property.

– The rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.

The Department also permits Section 203k mortgages to be used for individual units in condominium projects that have been approved by FHA, the Department of Veterans Affairs, or are acceptable to FNMA under certain guidelines.