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What You Need to Know About 203(k) Rehab Loans

Are you interested in rehabilitating or repairing a single-family home? If you are interested in completing a renovation, but you need help obtaining the funds necessary for the job, you might want to consider obtaining a Section 203(k) rehab loan. With a Section 203(k) rehab loan, which is provided through the Federal Housing Administration (FHA), you can still obtain a mortgage loan even when purchasing a fixer-upper. To enjoy these benefits, however, it is important to know more about 203(k) rehab loans and how you can go about getting this type of loan.

How is the 203(k) Rehab Loan Different From Other Mortgage Loans?

Typically, those who are interested in purchasing a home that is in need of rehabilitation must first obtain financing for the home and then separate financing for the repairs. After the work is complete, the homebuyer can then obtain a permanent mortgage. In the meantime, the initial loans typically have high interest rates and short amortization periods. With the 203(k) rehab loan, the buyer can obtain just one mortgage loan to cover both the cost of purchasing and repairing the home. The total amount of the loan provided through the program is based on the projected value of the property once the work has been completed.

Why Would a Lender Agree to a 203(k) Rehab Loan?

Since the 203(k) rehab loan is endorsed by the Department of Housing and Urban Development, the loan is fully insured. As such, the lender is protected as soon as the mortgage loan funds are disbursed.

What Types of Homes are Eligible for a 203(k) Rehab Loan?

To be eligible for the 203(k) rehab loan, the property must meet the following criteria:

  • Be a one- to four-family dwelling that has been in existence for at least one year
  • The number of units on the site must be in accordance with local zoning requirements
  • Newly-constructed units must be attached to a pre-existing dwelling
  • Demolished homes or homes that will be razed must have some of the existing foundation system still in place

While cooperative units are not eligible for this type of loan, the program can be used to convert a one-family dwelling up to as much as a four-family dwelling. Similarly, the program can be used to convert a multi-unit dwelling to anything from a one- to four-family dwelling. It is also possible to move an existing home or modular unit to the mortgaged property, but funding for the non-mortgaged dwelling will not be released until the new foundation is in place on the mortgaged property.

It is also possible to use a 203(k) rehab loan to purchase a mixed use residential property. For this type of property to qualify, however, the no more than 25 percent of a one-story building may be used for commercial purposes. In the case of a three-story building, the percentage is changed to 33 percent. For a two-story building, no more than 49 percent of the building may be used for commercial purposes. Regardless of the size of the building, the commercial usage of the building may not affect the health and safety of the residents and the funds from the 203(k) rehab loan can only be used for the residential portion of the building.

About The Author – Eric Bramlett is co-owner and broker of One Source Realty, a boutique Austin real estate firm, and specializes in Downtown Austin condos.

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