October 31, 2011
The FHA 203(k) Rehab loan allows buyers and current home owners to “finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home.”
The 203(k) can help raise the value of a property or simply make the home more comfortable for those who aren’t interested in selling.
Many people think of the 203(k) only when considering large projects, but did you know there’s a smaller version of the 203(k) allowed by the FHA? According to the HUD official site, “For less extensive repairs/improvements” borrowers are encouraged to apply for a Streamlined 203(k).
According to the rules of an FHA 203(K), the property must be at least one year old–the 203(k) isn’t meant for new construction homes. According to the rules, any house eligible for the rehab loan can be used as follows. “A portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed.”
The FHA adds an important set of qualifiers to the 203(k) rules. The cost of the rehab must be at least $5,000, but the rules state, “the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.”
An FHA 203(k) offers plenty additional choices to improve a home, including the removal of safety hazards, improving efficiency, and in some cases even landscape improvements. Ask your lender about the option for a Streamline 203(k) if you need to contemplate a smaller project that still qualifies for this FHA loan option.
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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