Rehab Home Loan From The Federal Housing Administration (FHA) Loans

Mortgage financing plans typically provide only permanent financing, with the lender not closing the loan until the condition and value of the property provide adequate loan security, according to the FHA, part of the Department of Housing and Urban Development. When a rehab is involved, the lender typically requires improvements to be complete before a long-term mortgage is made.

So what's a buyer to do? One option is to take advantage of the FHA's 203(k) loan program.

Through a 203(k), a buyer can obtain the money to acquire a property and have it repaired in a single transaction. Money for rehab work is set aside, placed in escrow, at the time of closing."

When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; 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 203(k) 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 rehabilitation, the mortgage amount is based on the projected value of 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 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.

Eligible Property

To be eligible, the property must be a one- to four-family dwelling that has been completed for at least one year.

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 203(k) mortgage may be originated on a "mixed use" residential property provided: (1) 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; (2) the commercial use will not affect the health and safety of the occupants of the residential property; and (3) 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.

Condominium Unit

The Department also permits Section 203(k) mortgages to be used for individual units in condominium projects that have been approved by FHA, the Department of Veterans Affairs, or are acceptable to FNMA under the guidelines listed below.

The 203(k) 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:

After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units. By law, Section 203(k) can only be used to rehabilitate units in one-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.

How the Program Can Be Used

This program can be used to accomplish rehabilitation and/or improvement of an existing one-to-four unit dwelling in one of three ways:

To purchase a dwelling and the land on which the dwelling is located and rehabilitate it, and to refinance existing indebtedness and rehabilitate such a dwelling, the mortgage must be a first lien on the property and the loan proceeds (other than rehabilitation funds) must be available before the rehabilitation begins.
 

As a Real Estate Advisor who work with numerous real estate investors we specialize in selling foreclosures and investment properties, and we firmly believe the program "is an excellent way for many buyers to purchase properties in poor condition. It also helps them to afford the repairs that they may have struggled to do without this specialized loan.

The rehab home loan 203k program is "great for first-time homebuyers who couldn't otherwise afford to purchase a home that was in need of repair. This rehab home loan, is geared for someone who's looking at their home as an investment and is willing to put in the time and effort.

We do work with builder and home improvement companies who can help you rehab home so do not hesitate to contac tus if you need a rehab loan in the los Angeles Area.

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