What are FHA rehab loans? Simply put, these are home loans you can apply for to buy or refinance a fixer-upper property. FHA rehab loans come as “standard” mortgages but there is also a special FHA rehab loan program for those who have homes located in a federally-declared disaster area.
The FHA 203(k) Rehab Loan
HUD 4000.1, the FHA loan handbook, describes the FHA 203(k) rehab loan as follows:
The Section 203(k) Rehabilitation Mortgage Insurance Program is used to:
-rehabilitate an existing one- to four-unit Structure, which will be used primarily for residential purposes;
-rehabilitate such a Structure and refinance outstanding indebtedness on the Structure and the Real Property on which the Structure is located; or
-purchase and rehabilitate a Structure and purchase the Real Property on which the Structure is located.
These FHA rehab loans can be used to buy or refinance, and borrowers should know that the appraisal process is designed to take the “as-is” value of the property into consideration as well as the “after improvements” value.
FHA 203(h) Rehab Loans
The FHA loan handbook describes the FHA 203(h) rehab loan as, “Mortgages to victims of a Presidentially-Declared Major Disaster Area (PDMDA) for the purchase or reconstruction of a Single Family Property.” FHA 203(h) rehab loans can be used to repair OR replace a home damaged by a natural disaster. They can also be used in conjunction with an FHA 203(k) loan.
The FHA 203(h) rehab loan is unique among FHA mortgages because it requires no down payment; 100% financing is available to qualified borrowers. The zero-down payment option is not available when using the FHA 203(h) loan in conjunction with an FHA 203(k).
In such cases, the terms and conditions of the FHA 203(k) loan would apply including the down payment requirement.
FHA Rehab Loan Requirements
FHA rehab loans are much different than new purchase mortgages. Since there is work to be contracted and paid for, an escrow account is required and there are rules for the dispersement of funds as the project moves forward.
FHA rehab loans are only for principal residences. You should expect loan approval for an FHA 203 rehab loan only for a property you intend to live in as your home address.
Credit requirements for a 203(h) rehab loan for disaster victims may be different than for an FHA 203(k) rehab loan. Borrowers who are affected by a natural disaster and live in a federally declared disaster area may find requirements more lenient than for other home loan products.
Rehab loans may require inspections, follow-up inspections and other procedures at the end of the rehab work. This is because the final state of the home must be in compliance with FHA minimum requirements plus applicable state or local building code.