In order to be eligible for a 203(k) loan, 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 according to the provisions of local zoning requirements. All newly constructed units must be attached to the existing dwelling. Co-op units are not eligible.  Homes that have been demolished or will be razed as part of the rehab work are eligible provided some of the existing foundation system remains in place.

In addition to typical home rehabilitation projects, this program can be used to convert a one-family dwelling to a two-, three-, or four-family dwelling. An existing multi-unit dwelling could be decreased to a one- to four-family unit.  An existing house (or modular unit) on another site 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 203(k) mortgage may be originated on a “mixed use” residential property provided:

• The property has no greater than 25% (one-story), 33% (three-story), and 49% (for a two-story) 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; and
• 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.

Condominium rehabilitation is subject to the following conditions:

After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units. By law, Section 203(k) can only be used to rehabilitate units in one-to-four unit structures. However, this does not mean that the condominium project, as a whole, can only have four units or that all  Information regarding specific requirements and restrictions is available at www.hud.gov, Rehab a Home w/HUD’s 203(k).

The Standard 203K insures mortgages covering the purchase or refinancing and rehabilitation of a home that is at least a year old. A portion of the loan proceeds is used to pay the seller or, if a refinance, to pay off the existing mortgage. The remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000 and loan limits are based on the property type and location. Buyer must occupy the property.  Investors are NOT eligible.

Eligible Improvements
The extent of the rehabilitation covered by a Standard 203(k) may range from relatively minor 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 such as chimney repair, additions to structure, installation of additional bath(s), skylights, finished attics/basements, etc.
• Modernization and improvements to the home’s function such as remodeled bathrooms/kitchens and permanently installed appliances
• Elimination of health and safety hazards
• Changes that improve appearance and eliminate obsolescence, including connecting to public water or sewer, heating, air conditioning, electrical systems
• Reconditioning or replacing plumbing, including interior whirlpool bathtubs
• Installing a well and/or septic system (must be installed or repaired prior to any other repairs to property)
• Adding or replacing roofing, gutters, and downspouts
• Adding or replacing floors and/or floor treatments such as wood, laminate, tile and carpeting
• Major landscape work and site improvements, including patios, decks, terraces and fences that improve the value of the property.  Correction of grading and draining problems is also included, as is tree removal and repair of existing walks and driveway if a safety hazard exists to property
• Enhancing accessibility for a disabled person, including remodeling kitchens/baths for wheelchair access, installing wider doors, exterior ramps, etc.
• Energy conservation improvements such as double-pane windows,  insulated exterior steel doors, caulking, weather stripping, etc.

It’s important to know what to expect when obtaining your FHA 203(k) loan.  Let’s go through the loan process step by step to give you a better understanding.

• Get Preapproved With a Qualified, Experienced FHA 203(k) lender.
• Location of Property, Execution of Contract, Location of Lender. The homebuyer locates a desired property.  After conducting a feasibility analysis to determine the extent of work required, rough cost estimate of work, and the expected market value of the property after completion of the work, a sales contract is executed.  The contract should state that the buyer is seeking a 203(k) loan and that the contract is contingent upon loan approval
• Preparation of Scope of Work Proposal. Buyer, contractor and consultant prepare a detailed proposal showing the scope of work to be done, including a detailed cost estimate for each repair or improvement, itemizing materials and labor.  An FHA-approved consultant is needed to assist in the final analysis of the feasibility of the entire project.
• Appraisal. A formal appraisal is performed to determine the value of the property after renovation.
• Mortgage Approval and Loan Closing. Once the borrower, subject property and requested improvements are approved, the loan closes for an amount that will cover the purchase or refinance cost of the property, along with improvement costs. The amount of the loan will also include a contingency reserve of 10% to 20% of the total remodeling costs and is used to cover any extra work not included in the original proposal. At closing, the seller is paid and the remaining funds placed in an escrow account for disbursement during the rehabilitation period.
• Construction Begins. The homeowner now has up to six (6) months to complete the proposed work, and may also decide to have up to six mortgage payments (PITI) put into the cost of rehabilitation if the property is not going to be occupied during construction, not to exceed the length of time estimated for completion of the project.
• Disbursement and Payment. As construction progresses, escrowed funds are released after the work is inspected by an approved inspector. A maximum of four draw inspections plus a final inspection are allowed.  When all work has been completed according to the approved architectural exhibits and change orders, the borrower provides a letter indicating that all work is satisfactorily complete and ready for final inspection. If the HUD-approved inspector agrees, the final draw may be released, minus the required 10 percent holdback.  Any unused contingency funds or mortgage payment reserves in the account must be applied by the lender to prepay the mortgage principal.

Congratulations, you’re done!   We hope you enjoy your new (or newly remodeled) home for years to come!