The Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD), administers various single family mortgage insurance programs. The Section 203(K) program is the Department’s primary program for the rehabilitation and repair of single family properties. As such, it is an important tool for community and neighborhood revitalization and for expanding homeownership opportunities.
Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before a mortgage is issued.
When a home buyer wants to purchase a house in need of repair or modernization, the home buyer usually has to obtain financing first to purchase the dwelling, additional financing to do the rehabilitation work, and a permanent mortgage when the work is completed to pay off the interim loans. Often the interim financing 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 to finance both the acquisition and the rehabilitation of the property.
Cost estimates for the proposed work must include labor and materials sufficient to complete the work by a contractor. Home buyers doing their own work cannot eliminate the cost estimate for labor, because if they cannot complete the work there must be sufficient money in the escrow account to get a subcontractor to do the work. HUD also stipulates that certain basic energy coservation and saftey improvements are included in the rehab process.
At settlement, the proceeds designated for the rehabilitation or improvement are to be placed in an interest bearing escrow account. Each phase of the improvements is funded via a “draw” from this account. An inspection of the work is performed by a HUD inspector who must sign off on the scope and quality of the work before the next phase can begin.
203(K) loans do involve quite a lot of paperwork, and you need to work with both a lender and contractor who have experience with the program.
Wallingford PA Real Estate – Wallingford, PA 19086
