Summary - The FHA's Section 203(k) insurance was designed to enable homebuyers and homeowners. They can finance the purchase of a house and the cost of its rehabilitation through a single mortgage. They can also finance the repair, rehab or special needs update of their existing home. This program can be used to refinancing a borrower's existing home and also include the cost of any repairs or updates that are needed. All these options include any special needs updates such as ramps, safety equipment or home modifications that are needed.
Purpose - FHA Section 203(k) fills a specific need for an assistance program for some homebuyers. When a purchaser wants to buy a house that needs repairs, modernization or special needs upgrades homebuyers usually have to follow an intricate, expensive and a drawn out process. The interim purchase and rehab loans often have relatively high interest rates, short terms and a balloon payment at the end.
Section 203(k) offers a solution that is an advantages to both the purchaser and the lender. This program insures a single, long term, fixed or adjustable rate loan that covers both the purchase (refinance) and/or repairs of a home.
FHA Section 203(k) insured loans help purchasers save time and money. They also protect the lender by having the loan insured before the repairs are made to the home. This gives the lender complete protection for the total balance of the loan before the property offers adequate equity to secure the full loan amount.
If the borrower has a less expensive repair/rehab/up-grade project the Streamlined 203(K) program may fit the bill. The FHA's Streamlined 203(k) program lets homebuyers finance up to an additional $35,000 onto their mortgage to improve or upgrade their home before move-in. With the Streamlined 203(K) program homebuyers can quickly and easily access cash to pay for property repairs, improvements or upgrade to include special needs additions.
Assistance - The FHA Section 203(k) program insures a mortgage issued to purchase or refinance and/or rehabilitate a home. This home must be at least one year old at the time the application for the mortgage is made. Part of the loan is used to pay the seller for the home or, in the case of a refinance, to pay off the existing mortgage. The remaining funds are placed in an escrow account and released as the repairs or rehabilitation is completed.
The total cost of the rehabilitation/repair project must be at least $5,000.00 and 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 the value of the property before rehabilitation plus the cost of rehabilitation or 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 helpful for lower income borrowers apply here however lenders may charge some additional fees that are not applicable to the basic FHA insured mortgage. These fees include but are not limited to supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehabilitation plan, a higher appraisal fee and other fees deemed appropriate by the FHA.
Eligibility - Any person who can make the monthly mortgage payments are eligible to apply. Cooperative units are not eligible but individual condominium units will qualify if they are in a condominium complex that has been approved by HUD/FHA or the VA.
Activities Allowed - The extent of the rehabilitation or repairs that are covered by FHA Section 203(k) insurance range from relatively minor, though total rehab. The costs of repairs must be more than $5,000.00. A home that has been or will be demolished as part of a rehabilitation/repair project is eligible, as long as the existing foundation system remains in place and intact. Adding on to the existing foundation as permitted.
FHA Section 203(k) insured loans can finance the rehabilitation or repair of the residential portion of any property that also has non-residential uses. This loan program can also cover the conversion of a property of any size to a one to four unit structure.
Improvements, repairs or upgrades that a borrower may make using FHA 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
It should be noted that HUD requires that properties financed under this program meet certain basic energy efficiency and structural standards. Check with HUD or visit the HUD website for complete details - WWW.HUD.Gov
Application - Applications must be submitted through a FHA approved lender and not directly to the FHA.
The FHA credit rules have just recently gotten stricter. What was acceptable a year or two ago is no longer in effect. However, FHA loans still offer more leeway in their terms and conditions than most conventional loans.
Interest rates on FHA loans are competitive but, due to the volatility of today's mortgage market, rates can and do change quite often. Check with your lender, broker or agent to get the latest rates.
FHA rules are subject to change. These were the guidelines at the time this article was written - January 20, 2012. Please check with the applicable agent or agency to ensure that they are still current before making any buying decisions.
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