|
 
September 2004
Index of all
past
Affiliate Corner columns
Renovate a home with HUD's 203(k)
By Linda Jones
Absolute Lending, Inc.
The section 203(k) program is the Federal Housing Administration's (FHA) primary program for
the rehabilitation and repair of single family properties.
To be eligible, the property must be a one- to four-family dwelling that has been completed
for at least one year. Condominium and cooperative units are not eligible.
This program can be used to purchase a dwelling and the land on which the dwelling is
located and rehabilitate it. It can also be used to refinance existing indebtedness and
rehabilitate such a dwelling.
There is a minimum $5,000 requirement for the eligible improvements on the existing
structure on the property. Any repair is acceptable in the first $5,000 requirement
that may affect the health and safety of the occupants. Minor or cosmetic repairs by
themselves cannot be included in the first $5,000, but may be added after the $5,000 threshold is reached.
Some examples of eligible improvements are...
- Repair of structural damage
- Finished basements
- Repair of insect infestations
- Remodel of bathrooms and kitchens, including permanently installed appliances
- Cover of porch or patio
- Installation of well and/or septic system
- Roofing , gutters
- Flooring, tiling and carpeting
- Energy conservation improvements
- Major landscape work including patios, decks and correction of drainage problems.
- Improvements for accessibility to the handicapped
In order to determine the maximum mortgage amount, the 203(k) valuation consists of two appraisals:
- As- Is Value – property is appraised in its present condition.
- Value After Rehabilitation – expected market value after improvements.
The lender has the authority to decide that an as-is appraisal is not necessary and may choose to use contract sales price or existing debt on the property. A HUD- owned property is not required. Purchasers including investors purchasing a HUD-owned property can refinance the property using 203(k) within six months of purchase. A copy of the HUD Sales Contract and the HUD-1 Settlement Statement must be submitted to verify the accepted bid price of the property and the closing date.
Cost estimates must include labor and materials to complete the work by a contractor. Description of the work for each item along with quantity and the cost of each item must be shown.
The mortgage amount may include funds for the purchase of the property or the refinance of existing indebtedness, the costs incidental to the closing the transaction, and the completion of the proposed rehabilitation. The mortgage proceeds allocated for the rehabilitation are escrowed at closing in a Rehabilitation Escrow Account. When the loan is closed, the proceeds designated for the improvements are to be placed in an interest bearing escrow account insured by the (FDIC) or NCUA).
Funds not to exceed the amount of six mortgage payments can be included in the cost of rehabilitation to assist a mortgagor when the property is not occupied during rehabilitation.
The mortgage amount, when added to any other existing indebtedness against the property, cannot exceed the applicable loan-to-value ratio and maximum dollar amount limitations prescribed for similar properties under Section 203(b).
Maximum Mortgage Calculation
The value is defined as the lesser of:
- The as-is value of the property before rehabilitation plus the cost of rehabilitation; or
- 110 percent of the expected market value of the property upon completion of the work.
Principal Residence (Owner-Occupant). The maximum mortgage amount is to be based upon 97/95 percent of the HUD estimate of value in the above examples.
Some of the above information is excerpts from REHAB A HOME WITH HUD'S 203(K) Pamphlet. U. S. Department of Housing and Urban Development.
|
