The FHA Section 203(k) loan, sometimes called a rehab loan, the Federal Housing Administration’s “primary program for the rehabilitation and repair of single family properties” according to the official site.
The FHA 203(k) is sometimes used in partnership with state or local agencies, non-profits and other groups to rehab homes, but the 203(k) can also be used by individuals to purchase and repair individual properties.
The 203(k) section at FHA.gov states, “When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods.”
The FHA 203(k) was created to simplify this process and cut expenses. The 203(k) is a single loan at a long-term fixed or adjustable interest rate. The loan amount is based not on the value of the property at purchase time, but rather the estimated value of the repaired or rehabbed home and the cost of the work needed to bring it up to that value.
FHA rules allow Section 203(k) Rehabilitation mortgages to be refinanced once the rehab project is completely done. According to the FHA, “rehabilitation work is considered complete by a fully executed certificate of completion”.
Additionally, the rehab loan escrow account must be closed with a “final release”. Rehab loans can be refinanced into FHA 203(b) loans, the typical FHA loan most borrowers apply for to purchase a home.