Saturday, October 26, 2013

The FHA 203(k) Rehabilitation Mortgage Insurance Program - The "Fixer-Upper" Loan

Under Section 203(k) of the National Housing Act, the Federal Housing Administration (FHA) offers mortgage insurance on loans issued by approved FHA lenders to help borrowers purchase and rehabilitate a home. The home should be one that the borrower plans to use as their primary residence. This same insurance program also covers cash-out refinance mortgage loans whose proceeds will be used by the borrower to rehabilitate their current home.

Why the "Fuss" About FHA 203(k) Loans?

Trying to buy a "fixer-upper" home and rehabilitate it can be a very complicated process for borrowers. It typically requires taking out multiple short-term loans with high interest rates. These loans often require a balloon payment when they become due.

The FHA created Section 203(k)-insured loans to address the needs of such borrowers wanting to rehabilitate new or existing homes. This program makes the process of buying and fixing up a new home much simpler by providing the borrower with one long-term mortgage loan that covers everything.

How Do Section 203(k) Loans Work?

There are several basic requirements for a home loan to be covered under Section 203(k). The home must be at least one year old, and the planned rehabilitation must cost a minimum of $5000. The property value of the home must fall within the FHA loan limits for that area of the country. FHA maximum loan limits differ for each county, borough, or county in the state where the property is located..

When a 203(k) loan is closed, some of the money goes to pay for the purchase or refinancing of the home. The remaining money is placed in an escrow account to pay for the work on the home. Funds from the escrow account are paid out as rehabilitation work is completed.

Work Covered By Section 203(k)

Many types of improvements can be covered under this program. They include but are not limited to:

  • modernization of the home
  • correcting health or safety hazards
  • repairing or replacing plumbing
  • repairing or replacing electrical
  • repairing or replacing roofing
  • repairing or replacing floors and floor treatments
  • landscaping and other work to improve the appearance of the property
  • energy efficiency improvements

Other types of home improvements are covered. You will want to consult your lender to find out if your particular rehabilitation needs can be covered under the program.

Who Can Apply?

Anyone can apply for an FHA 203(k)-insured mortgage as long as they can afford the monthly house payment based on their debt-to-income (DTI) ratio. To apply simply contact and FHA-approved lender. Many services are available online where you can fill out a single form and get referred to multiple lenders allowing you to compare multiple rates and loan offers.

J Hodson operates, an online resource for borrowers seeking information about FHA loans. There you can find more information on FHA 203(k) loans including the specific FHA maximum loan limits that apply to the particular county, borough, or parish where your property is located.
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