November 21, 2019

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FHA Rehab Loans: The Rules For 203(k)

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In a recent blog post we discussed the basics of the FHA 203(k) Rehab loan. This is a type of FHA loan that allows borrowers to repair a property being purchased with an FHA mortgage or to repair an existing home that was purchased previously.

According to the FHA official site, the home to be rehabbed with an FHA 203(k) must be at least one year old. “A portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and 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, but the total value of the property must still fall within the FHA mortgage limit for the area.”

How is the property value calculated for the purposes of the FHA 203(k) loan? According to the FHA official site, the value is arrived at 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.

There is a set of guidelines that cover what the funds from a 203(k) may be used to pay for. “The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor (though exceeding $5000 in cost) 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.”

The FHA rules governing Section 203(k) insured loans include permission to pay for the rehab of a residential property including areas that have non-residential uses. 203(k) finds may also be used to pay for “the conversion of a property of any size to a one- to four- unit structure.”

Here is a list of improvements that borrowers may make with 203(k) funds, as found on the FHA official site:

  • 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

There may be additional fees associated with an FHA 203(k). According to the official site, “Many of the rules and restrictions that make FHA’s basic single family mortgage insurance product (Section 203(b)) relatively convenient for lower income borrowers apply here. But lenders may charge some additional fees, such as a supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehabilitation plan, and a higher appraisal fee.”

Do you work in residential real estate? You should know about the free tool offered by FHA.com. It’s designed especially for real estate websites–a widget that displays FHA loan limits for the counties serviced by those websites.

It is easy to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today: http://www.fha.com/fha_loan_limits_widget

 

Joe Wallace - Staff Writer

By Joe Wallace

September 16, 2015

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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