Section 203(k) insurance enables homebuyers and homeowners to finance either 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. To be eligible, the property must be a one- to four-family dwelling that has been completed for at least one year.
The Section 203(k) program is HUD's primary program for the rehabilitation and repair of single family properties. As such, it is an important tool for community and neighborhood revitalization and for expanding homeownership opportunities.
Section 203(k) fills a unique and important need for homebuyers. When buying a house that needs repair or modernization, homebuyers usually have to follow a complicated and costly process. The interim acquisition and improvement loans often have relatively high interest rates, short repayment terms and a balloon payment. However, Section 203(k) offers a solution that helps both borrowers and lenders, insuring a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property. Section 203(k) insured loans save borrowers time and money. They also protect the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequate security.
For less extensive repairs/improvements there is the Streamlined 203(k) Limited Repair program. FHA’s Streamlined 203(k) program permits homebuyers to finance up to an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser.
For housing rehabilitation activities that do not also require buying or refinancing the property, borrowers may also consider HUD's Title I Home Improvement Loan program.
The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. Section 203(k)-insured loans can finance the rehabilitation of the residential portion of a property that also has non residential uses; they can also cover the conversion of a property of any size to a one to four unit structure. The types of improvements that borrowers may make using Section 203(k) financing include:
- Structural alterations and reconstruction.
- Modernization and improvements to the home's function.
- Elimination of health and safety hazards.
- Changes that improve appearance and eliminate obsolescence.
- Reconditioning or replacing plumbing; installing a well and/or septic system.
- Adding or replacing roofing, gutters, and downspouts.
- Adding or replacing floors and/or floor treatments.
- Major landscape work and site improvements.
- Enhancing accessibility for a disabled person.
- Making energy conservation improvements. HUD requires that properties financed under this program meet certain basic energy efficiency and structural standards.