Buying A Home With A 203(K) Rehab Loan

Sometimes homebuyers may come across the fixer upper home and after repairs would appear have a good investment on their hands.  Whether the homebuyer is handy or not at self-repairs they could get enough money to buy the home and make the repairs all with one mortgage loan.  The Federal Housing Administration (FHA) 203(k) mortgage loan allows homebuyers or homeowners to finance the cost of repairs into their total mortgage amount.  There are two programs for homebuyers and homeowners, the limited 203(k) mortgage program which allows up to $35,000 worth of repairs and/or upgrades to be added to the total loan amount.  Under the full 203(k) mortgage the cost of repairs/upgrades must at least total $5,000 and the upper limit is the total limit allowed for any FHA mortgage based on the area the home is located in.

As mentioned above the money does not need to be used for only repairs to a house.  The money can also be used to make updates to a home such as upgrading an outdated kitchen, replacing an old roof, making energy efficiency upgrades (solar, geothermal) and more.  The FHA 203(k) mortgage helps homeowners and homebuyers boost the value of homes and as a result local neighborhoods by allowing the upgrading or updating of homes needing it.

Who Can Use A 203(k) Mortgage To Purchase A Home?

The answer to the question of who can use the 203(k) mortgage to buy a home is only a homebuyer who will be occupying the home as their primary residence can use the loan.  Investors who will not be occupying the property need not apply.  On the other hand if a homebuyer plans on buying a 2-4 multi-unit building and reside in one the units then the 203(k) mortgage can be used to purchase a 2-4 multi-unit building that will also be fixed up with some of the money through the mortgage loan.  Generally the owner occupier must move into the home within 60 days of closing or final repair and must remain in the home for at least one year in order to use the 203(k) mortgage loan.  In a 2-4 multi-unit building the owner occupier may rent out the other units to tenants without any issue with the 203(k) loan.

How Does The 203(k) Loan Work?

In order to use a 203(k) loan a homebuyer or homeowner must find a lender who provides 203(k) loans.  Not every lender is equipped to offer 203(k) loans.  A list of local lenders can be found at the HUD.gov website.  As part of the loan application process a 203(k) loan consultant must be contacted for a property site visit so that a determination can be made that the repair/upgrade project is feasible.  If the consultant feels the project is not feasible then the 203(k) loan will be denied.  If the consultant feels the project is feasible they will write up the specifications, cost estimates, as well as prepare packages for the lender and contractors. 

A 203(k) loan can be used for a home that is in livable condition or one that is not in livable condition.  If a home is not in livable condition additional money can be included in the mortgage to allow the homebuyer to live somewhere else until the home is in livable condition.  The amount of money provided for living elsewhere will depend on local living costs, the time expected to make the current home livable and more.

Under the 203(k) loan program a homebuyer or homeowner cannot do their own work no matter how qualified or skilled they are.  The work must be performed by an unrelated professional contractor or contracting company.  The homeowner or homebuyer is able to choose which contractor will do the work, but those contractors may also be required to meet lender and HUD requirements prior to being able to do the actual work.

Just like a new construction home loan with periodic draws the 203(k) loan contractor receives payment for work over time as certain milestones with respect to the work are reached.  All the work is required to be done per local building codes and construction rules.  That means if permits are required those permits must be applied for and all inspections done as part of the permit process must pass.  Once the project is finished, all inspections passed and all liens released the final payment will be given to the contractor.

203(k) Down Payment requirements

As is typical with other government sponsored loans the 203(k) loan comes with a low down payment requirement.  Whereas many conventional loan products require 20% down the FHA 203(k) loan can be had with as little as 3.5% down payment.  Mortgage insurance will be required with the FHA 203(k) loan and the only way to eliminate the mortgage insurance will be to refinance the loan at a later date with one that does not have mortgage insurance requirement.  With the boost in value of the home as a result of upgrades and/or repairs it may be possible to realize a higher gain with which refinancing sooner rather than later would make sense.

Bottom Line

The FHA 203(k) loan represents a good method for homeowners and homebuyers to update or repair a home to increase the value.  With low down payment requirements the 203(k) loan allows homes that are in need of repair to be revitalized thereby helping not only the value of the home itself but also those in and around the neighborhood where it is located.

Additional Resources

• FHA Guidelines To Know About by Luke Skar
• How To Screen New Tenants by Dan Barcelon
• Important Mortgage Terms To Know by Paul Sian

About the author: The above article “Buying A Home With A 203(K) Rehab Loan” was provided by Luxury Real Estate Specialist Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. If you’re thinking of selling or buying your investment or commercial business property I would love to share my marketing knowledge and expertise to help you.  Contact me today!

I work in the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.