September 14, 2016
The FHA has a program that allows borrowers to apply for a mortgage loan in order to improve a property. The FHA 203(k) rehab loan is intended for borrowers who want to buy or refinance property and repair them, but not all borrowers have big rehab projects or work that requires a huge sum of money.
What are the FHA 203(k) options for borrowers? There are two different types of 203(k) loans-the typical version is available, but there is also a “limited” 203(k) for projects that require a smaller amount of funds.
The FHA official site describes the limited 203(k) as follows:
“FHA’s Limited 203(k) program permits homebuyers and homeowners to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home. Homebuyers and homeowners can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an FHA appraiser. Homeowners can make property repairs, improvements, or prepare their home for sale. Homebuyers can make their new home move-in ready by remodeling the kitchen, painting the interior or purchasing new carpet.”
What can be done with a limited 203(k)? There are some guidelines for the lender in HUD 4000.1:
“The Limited 203(k) may only be used for minor remodeling and non-structural repairs. The Limited 203(k) does not require the use of a 203(k) Consultant, but a Consultant may be used. The total rehabilitation cost must not exceed $35,000. There is no minimum rehabilitation cost.”
The “minimum rehabilitation cost” mentioned above refers to the standard 203(k) $5000 minimum loan for rehab work. 203(k) loans are available for single-family homes with one to four units. Additionally, HUD 4000.1 states:
“The Property must be an existing Property that has been completed for at least one year prior to the case number assignment date. If the Mortgagee is unsure whether the Property has been completed for at least one year, the Mortgagee must request a copy of the Certificate of Occupancy (CO) or equivalent.”
Some borrowers may wish to apply for a 203(k) mortgage because the home is not eligible for a standard FHA mortgage due to certain existing conditions that would not permit the property to pass the FHA appraisal: “A Property that is not eligible for a 203(b) Mortgage due to health and safety or security issues may be eligible under 203(k) if the rehabilitation or repair work performed will correct such issues.”
FHA loan rules say an FHA 203(k) can be used in conjunction with an FHA Energy Efficient Mortgage (EEM), which would allow the borrower to get additional funds to specifically apply towards approved energy efficient upgrades to the home, so it’s easy to see how the 203(k) would be an attractive option for purchasing a fixer-upper property.
FHA requirements do impose some limitations on how rehab loan funds can be used. HUD 4000.1 instructs the lender, “The 203(k) mortgage proceeds may not be used to finance costs associated with the purchase or repair of any luxury item, any improvement that does not become a permanent part of the subject Property, or improvements that solely benefit commercial functions within the Property”.
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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