REMODEL A HOME WITH HUD'S 203(K)

 Most mortgage financing plans only provide permanent financing. When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before a long-term mortgage is made.

With the 203(k) loan, a homebuyer can get one mortgage loan to pay for both the purchase and improvement to the property. With a 203(k) loan, the loan amount is based on the projected value of the home with work completed. There is no need to obtain a short term loan with a high interest rate.

203(k) Loan Uses:

  • Purchase a dwelling and remodel it.

OR

  • Refinance existing loans and make improvements to a property.

Eligible Properties:

  • One to four unit properties.
  • Any home as long as the foundation is intact.
  • Properties being converted from a one unit property to a two to four unit property, or; for converting a multi-unit property to a one to four unit property.
  • A home being moved from one location to another.
  • HUD HOMES that are designated as being eligible for a 203(k) loan.

Minimum Improvement:

 A minimum of $5,000 must be used for improvements to the existing structure on the property. Improvements must comply with HUD/FHA standards and where applicable, local building codes.

Required Down Payment:

For an Owner-Occupant financing a primary residence, the down payment is roughly 5 percent of the as-is value plus improvements.

 

For an Investor financing an investment property, the down payment is roughly 15 percent of the purchase price plus improvements.

Questions and Answers:

Q. Can a 203(k) loan be used for an Adjustable Rate Mortgage?

A. Yes. An Adjustable Rate Mortgage is available to Owner-Occupants. Investors are not eligible for Adjustable Rate Mortgages.

Q. Is a contractor required to do the work?

A. It is highly recommended. However, if the borrower wants to do any work or be the general contractor, they must be qualified to do the work, and do it in a timely and professional manner.
Borrowers doing their own work can only be paid for the cost of the materials. This does allow a borrower to pay for more improvements.

Q. If the borrower does the work, how is the cost for work estimated?

A. The cost estimate must be the same as if a contractor is doing the work, in case the borrower cannot (for some reason) complete the work.

Q. Does a property have to be run down or be a HUD Home to use a 203(k) loan?

A. No. Any home more than one year old a borrower may want to remodel is eligible. (Condominiums are excluded).

Q. Is there a time limit for completion of improvements?

A. Yes. A Rehabilitation Loan Agreement provides that:

•  work must be completed within 6 months

•  work must begin within 30 days

•  work must not cease for more than 30 days before it is finished

Q. Is there a guarantee for the work that is done?

A. HUD/FHA does not guarantee work performed by contractors. However, a 10% contingency reserve could be accessed to correct unsatisfactory work. In addition, the property owner must sign for their acceptance of work before money is released to the contractor.

Q. Is there a maximum income limit to be eligible for a 203(k) loan?

A. No, there is no maximum income limit. You only need to have sufficient income to pay the mortgage.

 

Eligible Improvements:

A minimum of $5,000 must be used for improvements to the property. Any repair is acceptable that would affect the health and safety of the occupants. Minor or cosmetic repairs by themselves cannot be included in the first $5,000 but may be added after the $5,000 threshold is reached.

Examples of eligible improvements (list is not all inclusive).

Structural alterations and reconstruction

•  Finishing attics and basements
•  Additions to a home
•  Building a garage

Modernization

•  Bathrooms
•  Kitchens
•  Built-in appliances

Elimination of health and safety hazards

•  Lead-based paint hazard elimination

Changes for aesthetic appeal

•  New siding
•  Adding a covered porch

Reconditioning or replacement

•  Plumbing
•  Electrical wiring
•  Heating and air conditioning

Energy conservation improvements

•  Double pane windows
•  Insulations

Roofing, gutters, and downspouts
Flooring, tiling, and carpeting
Major landscape work and site improvements

•  Patios and decks
•  Repair or replacement of driveways and sidewalks

Improvements for accessibility to the Handicapped

•  Exterior ramps
•  Wider doors
•  Modifications to kitchens and baths for accessibility

After the first $5,000 of improvements are determined, the following improvements can be added:

•  New freestanding appliances
•  Interior and exterior painting

Luxury items such as hot tubs, satellite dishes and tennis courts cannot be repaired or installed as part of a 203(k) loan.

More Information:

 To learn more about HUD/FHA 203(k) loan, call the nearest HOUSING AND URBAN DEVELOPMENT office. The telephone number can be found in the United States Government section of your white pages telephone directory.

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