FHA 203(k) Loan Program - Turning “Fixer-Uppers” into Dream Homes

What is the Section 203(k) Loan Program?

If you want to buy a home that needs repair or finance needed repairs to your current home, the Section 203(k) loan program by the U.S. Department of Housing and Urban Development (HUD) may be a good option for you. This program allows you to finance the purchase of a house—or refinance your current mortgage—and include the cost of its repairs through a single mortgage.

The Section 203(k) loan program is HUD’s primary Program for the rehabilitation and repair of single family properties. Section 203(k) loans are provided through HUD-approved mortgage lenders nationwide and insured by the Federal Housing Administration (FHA), which is part of HUD. “Section 203(k)” refers to the law, part of the National Housing Act, which allows FHA to make this mortgage insurance available.

The loans are beneficial for low and moderate income individuals or families since the loan down payment can be as little as 3 percent. While individuals, local governments, and non-profit organizations may participate as borrowers in the program, the property must be used as a principal residence by an individual or family.

How the Loan Works

You can take out a Section 203(k) loan as a 15 or 30 year fixed-rate mortgage or as an Adjustable Rate Mortgage (ARM) from a HUD-approved lender. The total amount of your mortgage will be based on the projected value of your home after the renovation is completed, taking into account the cost of the work. A portion of your loan is used to pay for the purchase of the home, or in the case of a refinance, to pay off any existing debt. The remainder is placed in an interest-bearing account on your behalf and released in stages as rehabilitation is completed.

FHA requires that you use a minimum of $5,000 toward eligible repairs or improvements and that you complete the repairs within six months after the loan’s closing depending on the extent of work to be completed. This first $5,000 primarily covers eliminating building code violations, modernizing, or making health and safety-related upgrades to the home or its garage. You may add minor or cosmetic repair after this requirement is satisfied, if applicable. You cannot include improvements for commercial use or luxury items, such as tennis courts, gazebos, or new swimming pools.

Eligible Home Improvements

The Section 203(k) loan covers a range of home improvements. These include, but are not limited to, the following:

• Remodeling bathrooms or a kitchen, including new built-in appliances

• Replacing a roof, gutters, and downspouts

• Adding a family room, bedrooms, or bathrooms

• Replacing flooring, tiling, or carpeting

• Completing a basement or attic conversion or adding a second story

• Expanding or building a garage or carport

• Renovating a deteriorating property, such as repairing a chimney, termite damage, or structural problems

• Upgrading plumbing, heating, air conditioning, or electrical wiring

• Eliminating health and safety hazards, such as removing lead-based paint

• Making the home accessible to the disabled

• Installing a well or a septic system

• Adding a porch, deck, or patio

• Adding or repairing siding or repainting

• Installing energy efficient windows or doors

• Repairing an existing swimming pool
 
(Source: HUD-2005-09-FHA February 2005 http://www.hud.gov/ espanol.hud.gov)