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The Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD, administers various single family mortgage insurance programs. These programs operate through FHA-approved lending institutions which submit applications th have the property appraised and have the buyer's credit approved.

These lenders fund the mortgage loans which the Department insures. HUD does not make direct loans to help people buy homes.

What is the primary function of the Section 203k program?

The Section 203k program is the Department's primary program for the rehabilitation and repair of single family properties. It's an important tool for community and neighborhood revitalization and for expanding homeownership opportunities. Since these are the primary goals of HUD, the Department believes that Section 203k is an important program and is intended to strongly support the program and the lenders that participate in it.

Many lenders have successfully used the Section 203k program in partnership with state and local housing agencies and nonprofit organizations to rehabilitate properties. These lenders, along with state and local government agencies, have found ways to combine Section 203k with other financial resources, such as HUD's HOME, HOPE, and Community Development Block Grant Programs, to assist borrowers. Several state housing finance agencies have designed programs specifically for use with Section 203k and some lenders have also used the expertise of local housing agencies and nonprofit organizations to help manage the rehabilitation processing.

The Department also believes that the Section 203k program is an excellent means for lenders to demonstrate their commitment to lending to lower-income communities and to help meet their responsibilities under the Community Reinvestment Act (CRA). HUD is committed to increasing homeownership opportunities for families in these communities and Section 203k is an excellent product for use with CRA-type lending programs.

How are 203k loans different?

Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan and release the mortgage proceeds unless condition and value of the property provide adequate loan security. When rehabing, a lender typically requires the improvements to be finished before a long-term mortgage is made.

When a homebuyer wants to purchase a house in need of repair or modernization, the home buyer usually has to obtain financing first to purchase the home; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods. The Section 203K program was designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property.

To provide funds for the property with the work completed, taking into account the cost of the work. To minimize the risk to the mortgage lender, the mortgage loan (the maximum allowable amount) is eligible for endorsement by HUD (the Department of Housing and Urban Development) as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At this point the lender has a fully insured mortgage loan.

The FHA is the only loan option for home buyers with low down payments, 3.5% down, and thought this was a fully underwritten loan, FHA is more forgiving of past credit mistakes if the underwriter can understand what happened, and why it won't happen again. The FHA financing terms work best for many borrowers who could qualify for conventional financing. But over the last two years the default rate is at an all time high, and the reserve fund they use to pain claims on defaulted loans is at a record low. The funds are so low with unemployment in double digits, and falling home prices. Compared to Fannie Mae and Freddie Mac that have been bailed out and taken over by the government, or all the big banks which would have collapsed if the government hadn't stepped in. So FHA has been a huge success and a key to any recovery in the housing market.

The FHA doesn't make loans directly. They act more as a mortgage insurance company insuring the lenders who actually hold the FHA loans against loss if the home doesn get forclosed on. The system has always been self funded and its been around since the 30s and the mortgage insurance they collect has been enough to pay for all losses without any additional government funds. 

What is the difference between a 203k and 203k Streamline?

The FHA 203k is designed so you include the cost of repairs and improvements into a purchase price and wrap it all into one loan. FHA has divided the program into two sections, the full 203k and the 203k Streamline, or Mini K. The full program is for major projects and with this you can do anything from a major remodel to a complete gut and rehab. The program is great but can be complicated and expensive. This is a good choice for big projects but the majority of projects can be completed under the FHA 203k Streamline.

The majority of projects will want to go with the Streamline 203k where the spending cap has been set at $35,000. The process of getting the Streamline 203k loan is much less complicated and with the scope of work more manageable, it is much easier to obtain. This program fits most projects because the majority of homes out there don't need complete gut rehab projects, and plenty of work can be completed at and under $35,000. The main restriction of the 203k Streamline is that you cannot change anything structural about the property.

Is your property eligible?

To be eligible the property must be a one to four family dwelling that has been completed for at least one year. The number of units on site must be acceptable according to the provisions of local zoning requirements. All newly constructed units must be attached to the existing dwelling. Cooperative units are not eligible. Homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided some of the existing foundation system remains in place. 

In addition to typical home rehabilitation projects this program can be used to convert a one-family dwelling to a two, three, or four family dwelling. An existing multi unit dwelling could be decreased to a one to four family unit. An existing house (or modular unit) on another site can be moved onto the mortgaged property; however, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation. 

A 203k mortgage may be originated on a mixed use residential property provide:

• The property has no greater than 25 percent (for a one story building); 33 percent (for a three story building); and 49 percent (for a two story building) of its floor area used for commercial (storefront) purposes
• The Commercial use will not affect the health and safety of the occupants of the residential property
• The rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.

Is your condominium unit eligible?

Yes. The Department permits Section 203k mortgages to be used for individual units in condominium projects that have been approved by FHA.

The 203k program was not intended to be a project mortgage insurance program, as large scale development has considerably more risk than individual single family mortgage insurance. Therefore, condominium rehabilitation is subject to the following conditions:

• Owner/occupant and qualified non-profit borrowers only; no investors
• Rehabilitation is limited only to the interior of the unit. Mortgage proceeds are not to be used for the rehabilitation of exterior or other areas which are the responsibility of the condominium association, except for the installation of firewalls in the attic for the unit.
• Only the lesser of five units per condominium association, or 25 percent of the total number of units, can be undergoing rehabilitation at any one time
• The maximum mortgage amount cannot exceed 100 percent of afte-improved value

After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units. By law, Section 203k can only be used to rehabilitate units in ont to four unit structures. However, this does not mean that the condominium project, as a whole, can only have four units or that all individual structures must be detached. For example, a project might consist of six buildings each containing four units, for a total of 24 units in the project and would be eligible for Section 203k. Likewise, a project could contain a row of more than four attached townhouses and be eligible for Section 203k because HUD considers each townhouse as one structure, provided each unit is separated by a 1 1/2 hour firewall (from foundation up to the roof).

Similar to a project with a condominium unit with a mortgage insured under Section 234c of the National Housing Act, the condominium project must be approved by HUD prior to the closing of any individual mortgages of the condominium units.

What are the required and eligible improvements?

Luxury items and improvements are not eligible as a cost rehabilitation. However, the homeowner can use the 203k program 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.

All Rehabilitation construction and/or additions financed with Section 203k mortgage proceeds must comply with the following:

Cost Effective Energy Conservation Standards

• Addition to existing structure. New construction must conform with local codes and HUD Minimum Property Standards
• Rehabilitation of existing structure to improve the thermal efficiency of the dwelling, the following are required:
  • Weatherstrip all doors and windows to reduce infiltration of air when existing weatherstripping is inadequate or nonexistent
  • Caulk or seal all openings, cracks or joints in the building envelope to reduce air infiltration
  • Insulate all openings in exterior walls where the cavity has been exposed as a result of the rehabilitation, insulate ceiling areas where necessary
  • Adequatelyventilate attic and crawl space areas
• Replacement Systems:
  • Heating, ventilation, and air conditioning systems supply and return pipes and ducts must be insulated whenever they run through unconditioned spaces
  • Heating systems, burners, and air conditioning systems must be carefully sized to be no greater than 15 percent oversized for the critical design, heating or cooling, except to satisfy the manufacturer's next closest nominal size
• Each sleeping area must be provided with a minium of one approved, listed and labeled smoke detector installed adjacent to the sleeping area