Is a “Rehab Mortgage” Right for Me?
If you’re interested in buying a home that requires significant repairs or upgrades, you may need help financing these additional expenses. The Federal Housing Administration (FHA) offers a unique program that may be a good fit for your needs, called Section 203(k) Rehab Mortgage Insurance.
Traditionally, buyers have needed to fund these repairs themselves, or secure a home improvement loan (usually at a higher borrowing rate) in addition to a mortgage for the house purchase. With the 203(k) program, however, borrowers can wrap the purchase and rehabilitation costs into a single mortgage offered at a competitive rate. Borrowers can select between a fixed- or variable-rate loan, up to 30 years. Like other FHA loans, the down payment can be as low as 3.5 percent.
Several features and limitations of the program:
- Only owner/occupants and nonprofit organizations can use a 203(k) loan. Investors aren’t eligible.
- A wide range of eligible improvements are covered, from relatively minor work (costing at least $5,000) to virtual reconstruction of the home (as long as the existing foundation system remains).
- The total value of the property must fall within the FHA mortgage limits for your area (found here).
- Your property’s value is considered the lesser of these two calculations: 1) the value before rehabilitation, plus the rehab costs; or, 2) 110 percent of the appraised property value after rehabilitation.
- Section 203(k) loans can also be used to convert a property of any size into a one- to four-unit structure. While the program is primarily intended for independent structures, owners of condos and townhomes can use it for interior projects.
- All work must be completed by contractors that have been pre-approved by FHA, called 203(k) Consultants. (This program is not intended for do-it-yourselfers.)
- Properties must meet certain energy efficiency and structural standards.
- Applications for a Section 203(k) loan must be submitted through an FHA approved lender. Your buyer’s representative can help you find one in your area.
Limited 203(k) Mortgages
The FHA also offers a streamlined program that provides financing of up to $35,000 in rehabilitation costs on top of an existing mortgage. It’s a simpler process that helps buyers make their home move-in ready. Or, current homeowners can use the funds to make repairs or improvements to prepare their home for sale.
To learn more about either 203(k) program, visit HUD’s website. Like any mortgage decision, shop around and compare costs before deciding on a loan that works best for you.