Rehabilitation Mortgage Insurance (Section 203(k)) (New buyer, homeowner)

Section 203(k) insurance enables homebuyers and homeowners to finance either:

• The purchase (or the refinancing) of a house and the cost of its rehabilitation through a single mortgage; or
• The rehabilitation of their existing home.

Purpose:

Section 203(k) is one of many FHA programs that insure mortgage loans -- and thus encourage lenders to make mortgage credit available to borrowers who would not otherwise qualify for conventional loans on affordable terms (such as first-time homebuyers) and to residents of disadvantaged neighborhoods (where mortgages may be hard to get).

Section 203(k) fills another unique and important need for homebuyers. When buying a house that is in need of repair or modernization, homebuyers usually have to follow a complicated and costly process:

• First, finding financing to purchase the property;
• Then getting additional financing for the rehabilitation work; and
• Finally, finding a permanent mortgage after rehabilitation is completed to pay off the interim loans.

The interim acquisition and improvement loans often have relatively high interest rates and short repayment terms. However, Section 203(k) offers a solution that helps both borrowers and lenders, insuring a single-, long-term, fixed- or adjustable rate loan, to cover the acquisition and rehabilitation of a property. Section 203(k) FHA-insured loans save borrowers time and money, and also protect lenders by allowing them to have the loan insured even before the condition and value of the property may offer adequate security. For less extensive repairs/improvements, see Streamlined 203(k). For housing rehabilitation activities that do not also require buying or refinancing the property, borrowers may also consider HUD's Title I Home Improvement Loan program.

Type of Assistance:

Section 203(k) FHA-insured mortgages cover the purchase or refinancing and rehabilitation of a home that is at least a year old. A portion of the loan proceeds is used to pay the seller or, if a refinance, to pay off the existing mortgage; and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by the lesser of:

1. The value of the property before rehabilitation plus the cost of rehabilitation; or
2. 110 percent of the appraised value of the property after rehabilitation.

Many of the rules and restrictions that make FHA's basic single-family mortgage insurance product (Section 203(b)) relatively convenient for low income borrowers apply here. But with Section 203(k) FHA-insured loans lenders may charge some additional fees such as:

• A supplemental origination fee.
• Fees to cover the preparation of architectural documents and review of the rehabilitation plan.
• A higher appraisal fee.

However, unlike other FHA-insured single-family mortgages, Section 203(k) borrowers do not pay an upfront mortgage premium.