HUD FHA 203K Rehab Loans
Funds For Handyman-Specials & Fixer-Uppers
The purchase of a house that needs repair is often a catch-22 situation, because the
bank won't lend the money to buy the
house until the repairs are complete, and the repairs can't be
done until the house has been purchased.
HUD's 203(k) program can help you with this quagmire and
allow you to purchase or refinance a property plus include in the
loan the cost of making the repairs and improvements. The FHA
insured 203(k) loan is provided through approved mortgage lenders
nationwide. It is available to persons wanting to occupy the
home as well as to investors wanting to increase their rental
portfolio, resell the property or let a first time homebuyer
assume the loan for no downpayment.
The downpayment requirement for an owner-occupant (or a
nonprofit organization or government agency) is approximately 5%
of the acquisition and repair costs of the property. An investor
has a downpayment requirement of 15%.
The 203(k) loan includes the following steps:
- A potential homebuyer locates a fixer-upper and executes a
sales contract after doing a feasibility analysis of the
property with their Realtor. The contract should state that
the buyer is seeking a 203(k) loan and that the contract is
contingent on loan approval based on additional required
repairs by the FHA or the lender.
- The homebuyer then selects an FHA-approved 203(k) lender and
arranges for a detailed proposal showing the scope of work
to be done, including a detailed cost estimate on each
repair or improvement of the project.
- The appraisal is performed to determine the maximum amount
of the mortgage.
- If the borrower passes the lender's credit-worthiness test,
the loan closes for an amount that will cover the purchase
or refinance cost of the property, the remodeling costs and
the allowable closing costs. The amount of the loan will
also include a contingency reserve of 10% to 20% of the
total remodeling costs and is used to cover any extra work
not included in the original proposal.
- At closing, the seller of the property is paid off and the
remaining funds are put in an escrow account to pay for the
repairs and improvements during the rehabilitation period.
- The mortgage payments and remodeling begin after the loan
closes. The borrower can decide to have up to six mortgage
payments (PITI) put into the cost of rehabilitation if the
property is not going to be occupied during construction,
but it cannot exceed the length of time it is estimated to
complete the rehab.
- Escrowed funds are released to the contractor during
construction through a series of draw requests for completed
work. To ensure completion of the job, 10% of each draw is
held back; this money is paid after the lender determines
their will be no liens on the property.
For more information about HUD's 203(k) Rehabilitation
Mortgage Insurance Program, please read the brochure entitled
Rehab a Home with HUD's 203(k)."
For a list of lenders who are offering the 203(k)
Rehabilitation Program, please see the 203(k) Lenders List. The
interest rate and discount points on the loan are negotiable
between the borrower and the lender.
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