July 26, 2017
In our last blog post, we discussed what is permitted under the FHA 203(k) rehab mortgage loan. Borrowers are allowed to apply for a new purchase loan or an FHA refinance loan under the 203(k) program, which the FHA loan handbook describes as being used to do the following:
– 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.
According to HUD 4000.1, “Structure” is defined as, “a building that has a roof and walls, and stands permanently in one place that contains single or multiple housing units that are used for human habitation”.
FHA 203(k) rehab loans come in two basic types-one is a smaller loan for less ambitious projects. The other features more money, and a longer list of approved rehab projects. According to the FHA loan rules for the Standard and Limited 203(k):
“The Standard 203(k) Mortgage may be used for remodeling and repairs. There is a minimum repair cost of $5,000 and the use of a 203(k) Consultant is required…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.
There is a list of improvements allowed under the FHA 203(k) rehab loan program, we covered that in our previous blog post. But what about specific improvements NOT covered under this program? According to HUD 4000.1 the following may not be financed under the FHA 203(k) rehab loan:
“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, including:
-recreational or luxury improvements, such as:
swimming pools (existing swimming pools can be repaired)
an exterior hot tub, spa, whirlpool bath, or sauna
barbecue pits, outdoor fireplaces or hearths
bath houses
tennis courts
satellite dishes
tree surgery (except when eliminating an endangerment to existing improvements)
photo murals
gazebos; or
– additions or alterations to support commercial use or to equip or refurbish space for commercial use.”
Speak to your lender about alternative financing for such projects, or how to identify approved rehab work for your home that would be permitted under the FHA 203(k) mortgage loan.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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