Home Equity Loan Center

Government Helps Buyers Fix Up Their Dream Home with the 203(k) loan

Finding the house of your dreams is often more difficult than one would think. Sometimes you think you finally found "the right one," but there always seems to be something missing, something not quite as you want it to be. Maybe the kitchen is outdated, or the house is missing a deck_something you feel you cannot live without. Maybe you will go ahead and buy the house anyway. You'll worry about repairs later. However, if you won't be able to secure a large enough loan to make all of the changes, perhaps you should consider a rehabilitation (rehab) mortgage.

A rehab mortgage is one that allows the buyer to finance the costs associated with repairs and improvements along with the mortgage itself. One big advantage of a rehab mortgage is that it allows you to have just one loan to cover all costs_the house itself and the home improvements. This means you only have to make one monthly payment.

One of the most popular rehab programs is available from the Federal Housing Administration (FHA) -- a division of the Department of Housing and Urban Development (HUD). It is the 203 (k) program. As with other FHA programs, the agency doesn't actually loan the funds. Rather the administration insures the loans through FHA approved lenders. In some cases it is possible to use other FHA or HUD programs in conjunction with a 203 (k) loan.

According to the HUD office in Houston, Texas, "the basic requirements for your property to be eligible for a 203 (k) loan are the following: Your property must be a one-to-four family dwelling that is owner occupied, that is at least one year old, and that meets the acceptable provisions of local zoning requirements." There is a $5000 minimum required for 203 (k) improvements; otherwise you cannot participate in the program. The maximum amount varies depending on the purchase price of the house. In order to determine the 203 (k) valuation there are usually two separate appraised values of the property. One value is the as-is value of the property before rehab. The other value is determined by the estimated market value of the property upon completion of the proposed rehab or improvements.

If you purchase a $100,000 house with 10% down, the amount financed would be $90,000. Therefore, if you borrow funds up to $27,000 for the rehab, your total loan would be $117,000 ($90,000 + $27,000) -- probably less than buying the house and then getting a home-improvement loan. The program can also be used to make property improvements by refinancing property that you purchased within the past six months. For most property you could expect to borrow 100% to 110% of the expected market value of the property.

You need to be knowledgeable of the limitations on what the 203 (k) funds can be used for. Some of the acceptable expenses are as follows:

• Structural alterations_repairs or replacements and additions, such as chimneys, attics, basements, and skylights qualify. Roofing, gutters, and downspouts may also be added or repaired.
• Modernization_including but not limited to remodeled kitchens, bathrooms, and built in appliances. Health and Safety items_(mainly dealing with the removal ;of lead-based paints, which may still be common in some older homes) are also included. Energy conservation improvements such as double pane windows, insulation, caulking, and weather-stripping are highly acceptable items.
• Aesthetic Appeal_changes affecting the actual appearance of the home, such as new siding, additional stories, covered porches, stair railings, and carports qualify. Flooring, tile, and carpeting may also be installed.
• Reconditioning or Replacing_heating system, air conditioning, electrical systems, and plumbing (including connecting to public water and/or sewer system) are acceptable items.
• Well or Septic System, which must be installed or repaired before beginning other repairs to the property, are important.
• Major landscape work and site improvement_such as patios, decks, and terraces that improve the value of the property_are included. (Trees, shrubs, and seeding or sodding cannot be included in the first $5000 requirement.)
• Accessibility improvements for a disabled person, such as wider doors and exterior ramps for wheelchair access and remodeling of kitchens and baths for wheelchair access, are acceptable.

There are a few exceptions considered luxury items, such as a swimming pool or tennis court, which cannot be included. Some cosmetic repairs may be added after the $5000 threshold for items affecting the health and safety of the occupants has been reached. These cosmetic items include interior and exterior painting and new free standing appliances, such as a range, a refrigerator, a washer and dryer, and a trash compactor.

The rehab programs used to be offered to both individual homeowners and investors. However, in October 1996 HUD placed a moratorium on all 203 (k) loans for investors. This was done because of abuse of the program by certain investors. The program used to work for investors the same way that it still works for individual homeowners. However, it also included rental properties such as condominiums, apartments, and other types of multiple family units. At the present time, HUD has not yet determined whether investors will be allowed back into the 203 (k) program.

The 203 (k) loan is an ideal solution for those who are willing to purchase a house with the intention of making repairs and/or improvements. Entirely too often people purchase a house, assuming that they will be able to finance the needed changes. Sometimes, lack of available credit postpones or negates such intentions. Utilizing a 203 (k) loan can help many people own a home and also create the house of their dreams.