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What is the FHA 203K Loan?

FHA Mortgage

Many single family homeowners are looking for loans to help repair their existing dwelling. The FHA 203 loan program is a home improvement loan administered by the Federal Housing Administration for the repair and rehabilitation of a property owned by a single family. The loan program can be used in partnership with other loan resources to assist borrowers in the repair of their homes and assist lenders to show how committed they are to help lower income families avail of loans and increase home ownership.

The loan program can be used for the improvement or repair of an existing one to four unit residence in several ways. The FHA 203K loan program can be used to buy an existing housing unit and the land where the house is located. It can also be used to buy an existing house in another location and transfer this to a new location that is mortgaged and repair/improve it. The loan can also be used for the outright repair of an existing house or pay for mortgage debts. It should be noted that when the dwelling is in another location, the mortgage must be a first lien on the property and that the loan will not be available until the purchased dwelling is already attached to the foundation of the new location.

For a borrower to be eligible for the FHA 203K loan, the house should had been completed for at least one year and it should be a 1 to 4 family dwelling and must pass the requirements for local zoning. It is also possible to apply the loan to homes that have been demolished or about to be demolished as part of a rehabilitation project as long as the existing foundation still remains.

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If there is an existing property that has multiple units, it can still qualify for the rehabilitation loan if the property can be decreased to a 1 to 4 family unit or to convert a one-unit family dwelling into a 2, 3, 4 family dwelling units. In the FHA 203K loan program, a modular unit or an existing house from another location needs to be connected already to the new location and inspected before the loan can be released.

It is also possible for a borrower to use the FHA 230K loan for a residential property that will have variable uses, like when the ground floor, for two to three story building will be used for commercial purposes like a store. The FHA 230K loan program allows this provided that only at least 25 per cent of the property will be used for commercial purposes. The commercial space should not affect the health and safety of the occupants of the residential property and that the loan will only be used to rehabilitate or repair the main dwelling areas and their access.

The minimum requirement is $5,000 for eligible home improvement for existing property structure. After meeting the first $5,000 of eligible home repairs, you can proceed to work on other minor or cosmetic repairs on the dwelling. Some of the repairs that will qualify for the first $5,000 of an FHA 230K loan are installation of an additional bath, skylight or finishing an attic or basement, repair of areas that are damaged by termite or treatment of termite infestation and replacement and repair of structural damage, repair of a chimney, repair of electrical, plumbing, heating and air conditioning systems.

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The requirements to qualify for the loan is the same as the requirements for a regular FHA mortgage loan but the borrower needs to have cash to cover the initial payment for materials and labor until the borrower is reimbursed. The FHA 203K loan program has a higher interest rate. The cash requirement is 3 to 5 per cent of the loan amount plus additional fees.