203k Loan Basics

What Is a 203k Loan?

FHA has been around for a long time and if you have ever had or heard of an FHA loan you were hearing about the 203(b) loan. The 203k is just a little farther down in the Section 203 loan list. The 203k loan is a fully disbursed loan which allows a borrower to purchase or refinance a property and finance the cost of rehabilitation with one loan. Because it is fully disbursed at closing, the 203k loan can be insured by HUD as soon as the loan closes.

The mortgage amount for these loans is based on the projected value of the property with the work completed, taking into account the cost of the work. HUD has taken a strong position to encourage this program and the loan is now easier to originate and close than ever before. Use a consultant. A 203k loan can close as fast as the lender can close a 203b loan.


203k Advantages

  • Up-front MIP can be financed into the loan
  • Non-profit organizations are eligible with only 5% down payment and can buy multiple properties
  • Finance up to 6 months mortgage payments
  • Special HUD down payment programs exist
  • Most closing costs can be financed
  • An FHA loan is assumable

Things You Can Do With The 203k

Mixed Use properties - You can renovate a mixed use property provided the commercial space represents less than one floor of the structure. The commercial uses cannot affect the health and safety of the occupants.

Home buyers and non-profits that purchase HUD-Owned properties can refinance the property using the 203k within six (6) months of the purchase, the same as if the buyer purchased the property with a 203k insured loan to begin with.

The borrower will be eligible as a first time home buyer without the three year waiting period if they are legally separated or divorced, even if they had an interest in a home with their spouse, provided the individual no longer has an interest in the home.

Non-profits can purchase a property, rehabilitate it and sell it or keep it. If the non-profit intends to keep the property as a rental then they should keep the acquisition and rehab costs at the lowest possible number to increase the cash flow.

If the non-profit sells the property they can take advantage of a unique aspect of this program called the "escrow commitment procedure" which allow them to secure a loan based on the "after improved" value of the property. Once a buyer is located that qualifies the non-profit is relieved of liability on that loan since it is fully assumable and the buyer takes over the mortgage. The buyer comes up with a 5% down payment that can be borrowed from the non-profit or anyone else to complete the transaction. If the buyer takes a second with the seller then it must be a five year note or longer. The non-profit may chose to forgive the second or collect it but in either case the non-profit has received 95% of their money up front. It has been setting in an escrow account since the original loan was funded drawing interest in the non-profits name.


203k Eligible Improvements

There is a minimum requirement of $5,000 in eligible (necessary) improvements on the subject property. Improvements to a detached garage, a new detached garage, or the addition of an attached unit (if allowed by local zoning ordinances) can also be included in this first $5,000. * The look a likes have no minimum amount of rehab. ** Read this carefully - this minimum has been removed... there is no minimum amount of rehab now...2008

The mortgage must include one or more of the items listed below:

  • Structural repairs and alterations.
  • Items such as additions to the structure; repairing any and all structural damage.
  • Improvement in the functionality or modernization.
  • Such items as remodeled kitchens and bathrooms.
  • Changes for aesthetic appeal, and the elimination of obsolescence.
  • New exterior siding and new doors.
  • Repair of replacement of plumbing, heating, air conditioning or electrical system. Installation of new plumbing fixtures are acceptable, including interior whirlpool bathtubs.
  • Installation of Well and/or Septic System.
  • Must be installed or repaired prior to beginning any other repairs to the property. Properties less than one acre in size can be limited on this item.
  • Replacement of flooring, carpeting or tiling.
  • Energy conservation improvement.
  • New dual pane windows and doors, storm windows, insulation, and solar domestic hot water systems.
  • Major landscape work and site improvement.
  • Patios and terraces that improve the value of the property equal to the cost, or that are needed to preserve the property from erosion.
  • Improvements for easier accessibility to the handicapped.
  • Handicapped retrofitting can be included in the cost of rehab. This is particularly good to get this information into the hands of vocational rehab companies and companies that deal with disabilities. They may have a list of clients for you.

The following items can be included in addition to the minimum $5,000 requirements:

  • New cooking ranges, refrigerators and other stand alone appliances.
  • Painting and other cosmetic repairs.
  • Fencing, new walks and driveways, and general landscape work trees, shrubs or seeding).
  • Repair of an existing swimming pool, up to $1,500. Any costs exceeding $1,500 must be paid into the Contingency Reserve by the borrower.

Note:
Items that will not become a permanent part of the property are not eligible. Luxury items are not eligible. These items include, but are not limited to New swimming pools, exterior hot tubs, saunas, spas, tennis courts, and barbecue pits.


The Streamlined 203k Loan

The Streamlined 203k is a newer product which was intended to save the buyer or homeowner money by not requiring a ‘consultant’ for the bid specifications. It allows a contractor to bid the project provided the work is relatively simple and is less than $35,000 in scope of work. However, a plan review is required.

What items remain ineligible for the Streamlined (k) program?

Properties that require the following work items are not eligible for financing under the Streamlined (k):

  • Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;
  • New construction (including room additions);
  • Repair of structural damage;
  • Repairs requiring detailed drawings or architectural exhibits;
  • Landscaping or similar site amenity improvements;
  • Any repair or improvement requiring a work schedule longer than six (6) months; or
  • Rehabilitation activities that require more than two (2) payments per specialized contractor.
Mortgagors may not use the Streamlined (k) program to finance any required repairs arising from the appraisal that do not appear on the list of Streamlined (k) Eligible Work Items or that would:

  • Necessitate a “consultant” to develop a “Specification of Repairs/Work Write-Up”;
  • Require plans or architectural exhibits;
  • Require a plan reviewer;
  • Require more than six months to complete;
  • Result in work not starting within 30 days after loan closing; or
  • Cause the mortgagor to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted. (FHA anticipates that, in a typical case, the mortgagor would be able to occupy the property after mortgage loan closing).