FHA 203k Program – How It Is Different?
Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before a long-term mortgage is made.
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 for the rehabilitation; 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 203k program was designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. To minimize the risk to the mortgage lender, the fha 203k loan (the maximum allowable amount) is eligible for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At this point, the lender has a fully-insured mortgage loan.
To be eligible for the FHA 203k , the property must be a one- to four-family dwelling that has been completed for at least one year. The number of units on the site must be acceptable according to the provisions of local zoning requirements. All newly constructed units must be attached to the existing dwelling. Cooperative units are not eligible.
Homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided the existing foundation system remains in place.
In addition to typical home rehabilitation projects, FHA 203k program can be used to convert a one-family dwelling to a two-, three-, or four-family dwelling. An existing multi-unit dwelling could be decreased to a one- to four-family unit.
An existing house (or modular unit) on another site can be moved onto the mortgaged property; however, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation.
A FHA 203k mortgage may be originated on a “mixed use” residential property provided: (1) The property has no greater than 25 percent (for a one story building); 33 percent (for a three story building); and 49 percent (for a two story building) of its floor area used for commercial (storefront) purposes; (2) the commercial use will not affect the health and safety of the occupants of the residential property; and (3) the rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.
The Department also permits FHA 203k mortgages to be used for individual units in condominium projects that have been approved by FHA.
The FHA 203k program was not intended to be a project mortgage insurance program, as large scale development has considerably more risk than individual single-family mortgage insurance. Therefore, condominium rehabilitation is subject to the following conditions:
*Owner/occupant and qualified non-profit borrowers only; no investors;
*Rehabilitation is limited only to the interior of the unit.
*Only the lesser of five units per condominium association,or 25 percent of the total number of units, can be undergoing rehabilitation at any one time;
*The maximum mortgage amount cannot exceed 100 percent of after-improved value.
After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units. By law, FHA 203k can only be used to rehabilitate units in one-to-four unit structures. However, this does not mean that the condominium project, as a whole, can only have four units or that all individual structures must be detached.
Example: A project might consist of six buildings each containing four units, for a total of 24 units in the project and, thus, be eligible for Section 203(k). Likewise, a project could contain a row of more than four attached townhouses and be eligible for FHA 203k because HUD considers each townhouse as one structure, provided each unit is separated by a 1 1/2 hour firewall (from foundation up to the roof).
How the Program Can Be Used
FHA 203k can be used to accomplish rehabilitation and/or improvement of an existing one-to-four unit dwelling in one of three ways:
*To purchase a dwelling and the land on which the dwelling is located and rehabilitate it.
*purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehabilitate it.
*To refinance existing liens secured against the subject property and rehabilitate such a dwelling.
To purchase a dwelling and the land on which the dwelling is located and rehabilitate it, and to refinance existing indebtedness and rehabilitate such a dwelling, the mortgage must be a first lien on the property and the loan proceeds (other than rehabilitation funds) must be available before the rehabilitation begins.
To purchase a dwelling on another site, move it onto a new foundation and rehabilitate it, the mortgage must be a first lien on the property; however, loan proceeds for the moving of the house cannot be made available until the unit is attached to the new foundation.
Luxury improvements are not eligible.
The homeowner can use the FHA 203k to finance such items as painting, room additions, decks and other items even if the home does not need any other improvements. All health, safety and energy conservation items must be addressed prior to completing general home improvements.
All rehabilitation construction and/or additions financed with FHA 203k Streamline mortgage proceeds must comply with the following:
A. Cost Effective Energy Conservation Standards
(1) Addition to existing structure. New construction must conform to local codes and HUD Minimum Property Standards in 24 CFR 200.926d.
(2) Rehabilitation of Existing Structure. To improve the thermal efficiency of the dwelling, the following are required:
a) Weather strip all doors and windows to reduce infiltration of air when existing weather stripping
is inadequate or nonexistent.
b) Caulk or seal all openings, cracks or joints in the building envelope to reduce air infiltration.
c) Insulate all openings in exterior walls where the cavity has been exposed as a result of the
rehabilitation. Insulate ceiling areas where necessary
d) Adequately ventilate attic and crawl space areas. For additional information and requirements,
refer to 24 CFR Part 39.
(3) Replacement Systems.
a) Heating, ventilating, and air conditioning system supply and return pipes and ducts must be insulated whenever they run through unconditioned spaces. b) Heating systems, burners, and air conditioning systems must be carefully sized to be no greater than 15 percent oversized for the critical design, heating or cooling, except to satisfy the manufacturer’s next closest nominal size.
Call us today at 424 225 2167 for help. One of our mortgage professionals will help you get the best possible FHA 203k loan solution for your situation. We’ll be with you every step of the process and not hand you off to someone else.
C2 Financial Corporation is approved to originate VA and FHA loans, and has the
ability to broker such loans to VA and FHA approved lenders. C2 Financial
Corporation is not acting on behalf of or at the direction of HUD/FHA or the VA.