Guide to Using a FHA 203K Loan to Buy & Rehab a Home

The Fixer-Upper Loan

The U.S. government has a number of programs that provide various types of guarantees for housing purchases and housing rehab. A popular loan for rehabbing a home is the FHA 203K loan administered by the Federal Housing Administration, a part of the Department of Housing and Urban Development.

These loans provide single family mortgage insurance and back loans provided by FHA-approved lenders, such as Prospect Mortgage. Loan applications are submitted to verify a home’s market value along with a potential buyer’s credit. As is standard in such loans, HUD does not provide funds for the mortgage. Rather, the agency stands behind an approved loan in the case of default.

Guide to Using a FHA 203K Loan to Buy & Rehab a Home

What Properties Qualify for a FHA 203K Loan

Many communities and local governments support the FHA 203K loan program to encourage redevelopment of depressed areas. The specific qualifications for such a loan from Prospect Mortgage include a property that:

• Is a one-to four-family residence
• Has been built for more than one year
• Is part of a community with an acceptable density of homes
• Are not part of a cooperative
• May be demolished but have an existing foundation system

Most loans are sought for rehabilitation. However, the loan may also be used for converting a single family dwelling into up to four units, or a multi-family dwelling into one that is for one-to four-families. There are also a number of other options for modular units and mixed use residential properties, although separate qualifications apply.

The Condominium Provisions

The 203k can also be used for individual dwellings in a condominium development, so long as they are FHA approved. While HUD specifically states the program is not intended to serve as project mortgage insurance, it does not eliminate use for single family units. If intended for a condominium unit, the rules require that:

• The loan be used only by owner/occupants and non-profits, and not for investors
• Only rehabilitation of the interior is allowed
• No more than the lesser of five or 25 percent of all the units in a project be under rehabilitation at one time
• Loans cannot exceed 100 percent of the after rehabbed value

Additionally, no one dwelling in a project can contain more than four units if the 203k loan is used on any unit.

Seeking a 203K Loan

After consideration of all the different qualifications and restrictions, a loan backed by this program is appropriate for three separate situations, including:

• Purchase of a residence and its land for rehabilitation of the property
• Purchase of a property to be moved onto a new foundation at the site of the mortgage property for the purpose of rehabilitation
• Refinancing of liens currently existing on a property to allow rehabilitation of that property

The liens generated by such loans must be first mortgages and loan proceeds cannot be granted for moving a property until it is already attached to the foundation where it will be located.

There are also a number of restrictions and regulations concerning the type of rehabilitation construction that will qualify for loans. All such construction must comply with HUD Minimum Property Standards and certain cost-effective energy conversation standards must be met. Additionally, no improvements considered as luxury are allowed.

Prospect Mortgage can help you evaluate the potential of this loan for your rehabilitation project.