The 203(k) Home Rehab Loan is designed for homebuyers who want to purchase homes in need of repairs and/or modernizing. Previously, additional financing for rehabilitation involved interim financing with high interest rates and short amortization periods. With the 203(k) program, potential homebuyers can get one mortgage loan to finance both the acquisition and rehabilitation of the property.
The mortgage amount is based on the value of the property after work is completed. Eligible property must be at least one year old, must be dwellings designed for one to four families, and must meet local zoning requirements. Demolished or razed homes are eligible as long as some of the existing foundation system is in place. Properties that are not eligible are newly constructed detached units and cooperative units.
Other eligible properties include houses or modular units that have been moved onto the mortgaged property. Non-mortgaged property is not allowed until the new foundation has been inspected. Mixed-use properties are eligible as long as no more than 25% for a one story, 33% percent for a three story, and 49% for a two story are used for commercial purposes and the funds will only be used for the residential functions and areas.
Condos are eligible for a 203(k) as long as they are owner occupied and rehab funds are used for the interior only. In addition, the lesser of five units per condo association or 25% of the total number of units can be under rehabilitation at any one time, and the maximum mortgage amount cannot exceed 100% of the after-improved value. Condo investors are not eligible.
A 203(k) allows homebuyers the flexibility to make a number of improvements and repairs and save for luxury items. Improvements can include painting, room additions, decks, and other items. All improvements must include Cost Effective Energy Conservation Standards. For new construction, the standards must conform with HUD Minimum Property Standards and local codes. For rehabbing existing structures, required improvements include smoke detectors, weather-stripping, caulking, insulation, ventilation, and replacing inadequate heating, ventilating, and air-conditioning systems.
The 203(k) Home Rehab Loan program is ideal for all homebuyers, since most homes on the market require some repairs and improvements. Improving your home’s appearance, insulation, ventilation, as well as its heating and cooling systems will save you thousands of dollars in utility bills, as well as increase your return on investment.