There is a program that is helping home buyers get the home of their dreams and yet many people know nothing about it. REO's (Real Estate Owned) are the properties to buy these days as the market is still fluid and good for investment buyers. Many REO properties are listed well below the general market price and most of these properties will accept traditional FHA (Federal Housing Administration) financing. The problem with these bank owned properties is that many of properties are in dire need of repair. A buyer approved for a FHA loan may get turned down if the repairs exceed the approved loan price. This is where the 203k Rehabilitation Home Mortgage (Section 203K) comes into play. This program is seldomly used and offers FHA home buyers up to $292,500 to be rolled into their FHA loan for repairs. Section 203K allows more buyers to purchase a home and raises the value of the home from the start.
If a buyer was to purchase a home appraised at $250,000 but the home needed $50,000 in repairs, many buyers were left out in the cold since the FHA loan wouldn't cover the additional $50,000. Section 203K started decades ago. The way it works for the buyer is that the FHA insures not only the loan but also insures the money for renovations and repairs. The extra insurance coming from a government funded loan program allows the lenders to feel more comfortable in allowing a loan to be accepted.
The renovations must meet HUD (Housing and Urban Development) standards for energy improvements like heating and air conditioning, window caulking and weather stripping. Buyers can even use the loans to make cosmetic upgrades, including new floors and appliances. The money is monitored in a FHA escrow account and also gives buyers many finance options depending on what the cost of the repairs might be. The loans require only a 3.5 percent down payment and come with lower income and credit restrictions than conventional loans. The sales price can also exceed the appraisal by 10%.
Eligible properties for Section 203K are one- to four-family residences where construction has been completed for a minimum of one year. All zoning requirements must comply on a state and federal level. If you have units that were built after the original dwelling was constructed, these units must be physically attached to the original dwelling. Co-op units are currently not eligible for Section 203K. If the home you are looking to buy has been demolished or will be razed when you start your own renovations, this home is also eligible for Section 203K as long as the some of the foundation is still there.
There are many options a buyer can use when selecting this rehabilitation loan. Section 203K can be utilized to convert a single family dwelling into a multi-family dwelling as well as changing a multi-family dwelling back into a single family dwelling. Existing homes, modular homes or mobile homes can be transported to the mortgaged property. If a buyer plans to move a home to a mortgaged property, the release of the loan money will not happen until after the inspection of the new foundation and the transfer of the dwelling to the new property.
A Section 203K mortgage can also be taken out on a multi-zoned residential/commercial property, provided that the property is within the percentage guidelines of the floor area storefront to residential purpose (according to the guidelines within Section 203K and FHA), health and safety regulations are followed, and the Section 203K mortgage will only be used for the residential portion of the property and not for any commercial use.
Section 203K also permits the usage of this rehabilitation mortgage to be used for individual condo units that have gone through the approval process with FHA. Section 203K has limitations regarding approval for buyers purchasing an individual condo unit, such as buyers must be a qualified owner/occupant or a non-profit buyer; investors do not qualify, all restoration funds are limited to the interior areas of the individual condo unit and cannot be used for any exterior rehabilitation, only one out of five condo units or 25% of the total units can be going through rehabilitation at the same time, and the mortgage amount cannot be greater than one hundred percent of the improved value of the individual condo unit. The project must also be approved by HUD before the closing of any individual unit mortgage.
Buyers can use the Section 203K to finance such items as painting, room additions, decks and other items even if the home does not need any other improvements. All health, safety and energy conservation items must be addressed prior to completing general home improvements. Section 203K cannot, however be used to purchase luxury items for the home or property.
All improvements must follow HUD's Minimum Property Standards (24 CFR 200.926d and/or HUD Handbook 4905.1) as well as the buyer's own local codes and city ordinances. It is sometimes in the best interest for the buyer to consult an architect or other qualified professional to prepare the proposal as well as providing all necessary documentation to show the scope of the rehabilitation and renovation project.
Cash buyers are not excluded from participating and qualifying for Section 203K. Cash buyers can refinance an already purchased property using Section 203K as long as it is within six months of purchase. All mortgage calculations will be done the same as a purchase transaction. Cash back will be allowed to the borrower in this situation less any down payment and closing cost requirement for Section 203K. A copy of the Sales Contract and the HUD-1 Settlement Statement must be submitted to verify the accepted bid price (as-is value) of the property and the closing date.
While the added paperwork, additional inspections, and possible longer lengths of time from contract to close can be a hassle, home buyers in can finally achieve their goal of purchasing their dream home in a very difficult economic setting, and have the funds to do the necessary renovations to their new home. Section 203K is a great option for home buyers and we ready to help you achieve that goal. If you have more questions on Section 203K, a government funded FHA rehabilitation mortgage option, please contact our offices at: 727-942-2929 or 1-877-232-9695. We are open 7 days a week.