The 203(k) Rehabilitation Mortgage Insurance Program

What do first-time homebuyers and existing homeowners need to know about getting home rehabilitation loans?

Owning a home is a major investment, but not everyone can afford buying their own. So, for first-time homebuyers, especially for those within the low- to moderate-income bracket, they usually look into homes and properties that are cheaper. Some of them would resort to buying foreclosed homes because of their affordability.

But if your purchased home has already been damaged, worn down by years and inclement weather, it may not be eligible for traditional bank financing. Homebuyers quickly realize they don't have the extra cash to spare to cover the necessary home repairs and upgrades. You will not find banks financing home improvements since they sell foreclosed properties as-is -- the present condition they are in.

To solve this financing dilemma, people look to the U.S. Department of Housing and Urban Development's (HUD) grants and loans to request for funds in rehabilitating their purchased homes. HUD doesn't own any residential properties, but the agency offers funding to support several housing assistance programs.

This is where HUD's Federal Housing Administration's (FHA) 203(k) Rehabilitation Mortgage Insurance comes in. When granted with a 203(k) Mortgage, homebuyers can get hold of the funds to obtain their properties and have them repaired in a single transaction. The 203(k) Mortgage is FHA's “primary program for the rehabilitation and repair of single family properties. As such, it is an important tool for community and neighborhood revitalization, as well as to expand homeownership opportunities.”

Three options to choose from

FHA, which renders mortgage insurance on loans prepared by FHA-approved lenders across the United States, allows homebuyers and homeowners to acquire rehabilitation mortgage financing through three main programs: the original program, Section 203(k); the Streamlined 203(k) Mortgage; and the PowerSaver Pilot 203(k) Mortgage.

Section 203(k) Mortgage:

The program starts with homeowners and homebuyers submitting their applications through their chosen FHA approved lender. Then, the lender appoints an FHA-approved consultant, who develops a plan identifying the specific work needed for the property. An appraiser will be called upon to determine the value of the repaired property.

The Section 203(k) program is geared for the more extensive home repairs and improvements while offering a solution to help borrowers and lenders alike. The program insures a single, long-term, fixed or flexible rate loan that includes both the purchase and rehabilitation of a property.

HUD usually requires that the properties financed within this program must adhere to a particular energy efficiency and structural standard. To be eligible for this program, properties should be a one- to four-family residence that has been completed for a year, at least.

The types of home rehabilitation that borrowers may make under this financing program include, but not limited to:

· Structural modifications and renovations

· Modernization within the home

· Removal of health and safety hazards (disposal of defective paint or lead-based paint), elimination of obsolescence

· Appearance improvements

· Plumbing replacements, reconditioning, new installations of septic system

· Roof, window, floor, gutter replacements and treatments

· Accessibility improvements for households that have people with disabilities

· Energy conservation and landscape site improvements

Streamlined 203(k) Mortgage:

For less extensive, uncomplicated home rehabilitation without requiring the services of consultants, architects and engineers, homebuyers and homeowners have another option: the Streamlined 203(k) Mortgage. It is designed to be “more reflective of the desire of many homebuyers and existing homeowners to improve their homes including making them more energy efficient.”

This program allows homebuyers and homeowners to obtain up to $35,000 in funds into their mortgage to refurbish or upgrade their properties.

The types of home improvements borrowers may make under this financing program include:

· Roof, gutters and downspouts replacements and repairs

· Existing HVAC systems replacements, repairs, installations

· Plumbing and electrical systems upgrades

· Floor, window, door, wall replacements

· Minor kitchen remodelling, purchase and installation of new appliances

· Interior and exterior painting

· Weatherization improvements

· Accessibility improvements for households that have people with disabilities

· Disposal/removal of lead-based paint hazards

· Exterior replacements (porches, decks, patios)

· Basement finishing, waterproofing and remodelling

· Septic system repairs and installations

Similarly with Section 203(k), the Streamlined (k) may be used for single-family housing sold by HUD.

PowerSaver Pilot 203(k) Mortgage:

This relatively new FHA program is more like an expansion of the 203(k) Rehabilitation mortgage insurance program. Homeowners that include energy efficiency improvements with their home rehabilitation project can qualify for low-cost financing provided by participating FHA-approved lenders.

The energy saving upgrades should amount to a minimum of $3,500, which also cover replacement and installation of solar and other renewable energy technologies.

The types of home improvements borrowers may make under this financing program include:

· Roof, gutter, and downspouts replacements

· Home modernization, room, kitchen or bath renovations

· HVAC replacements (and make them more energy efficient), new replacements/installations of appliances, including geothermal or wood systems

· Structural revisions and renovations

· Floor repairs, additions, treatments

· Landscape and site improvements (and make them more environment-friendly)

· Accessibility improvements for households that have people with disabilities

General requirement for all these programs: All persons (homeowners and homebuyers) who can pay off the monthly mortgage are eligible to apply.