The FHA 203(k) Loan is FHA’s primary financing program for the rehabilitation and repair of single family homes. It enables homebuyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage.

When buying a house that needs repair or modernization, homebuyers usually have to follow a complicated and costly process. The interim acquisition and improvement loans often have relatively high interest rates, short repayment terms and a balloon payment. However, Section 203(k) offers a solution that helps both borrowers and lenders, insuring a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property.

A 203(k) Loan has benefits for existing homeowners too. They can use 203(k) loans to make property repairs and improvements or to help prepare their home to be put up for sale.

203(k) loans help both borrowers and lenders, because they insure a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property. These loans save borrowers time and money. They also protect the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequate security.

How 203(k) Loans Work for Homebuyers:

A portion of the loan proceeds is used to pay the seller and the remaining funds are placed in an escrow account and are released in installments as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.

Many of the rules and restrictions that make FHA’s basic single family mortgage insurance product Section 203(b) relatively convenient for lower income borrowers apply here. But lenders may charge some additional fees, such as a supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehabilitation plan, and a higher appraisal fee.

Eligible Activities:
The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. Section 203(k) insured loans can finance the rehabilitation of the residential portion of a property that also has non-residential uses; they can also cover the conversion of a property of any size to a one- to four- unit structure. The types of improvements that borrowers may make using Section 203(k) financing include:

• structural alterations and reconstruction
• modernization and improvements to the home’s function
• elimination of health and safety hazards
• changes that improve appearance and eliminate obsolescence
• reconditioning or replacing plumbing; installing a well and/or septic system
• adding or replacing roofing, gutters, and downspouts
• adding or replacing floors and/or floor treatments
• major landscape work and site improvements
• enhancing accessibility for a disabled person
• making energy conservation improvements

HUD requires that properties financed under this program meet certain basic energy efficiency and structural standards.

Put more simply a 203(k) loan works like this:

You, the homebuyer, get a loan for the purchase price and a loan for remodeling together in one single loan.

Purchase Price: $100,000

Remodeling cost: $20,000 (Including 10% Reserve)

Total loan: $120,000

203(k) Limited Loans

FHA also offers a Limited 203(k) program that permits homebuyers and homeowners to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home. Homebuyers and homeowners can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an FHA appraiser. Homeowners can make property repairs, improvements, or prepare their home for sale.  Homebuyers can make their new home move-in ready by remodeling the kitchen, painting the interior or purchasing new carpet.

Not all FHA lenders offer 203k financing. To find a lender that offers 203k mortgages, go to http://www.hud.gov/ll/code/llslcrit.cfm, and select the 203k option at the bottom of the page.