ACCEPTABLE PROPERTY TYPES
Does the rehabilitation construction have to comply with HUD's Minimum Property Standards?
Yes. The improvements must comply with HUD's Minimum Property Standards and all local codes and ordinances.
Is the Section 203k program restricted to single-family dwellings?
No. The program can be used for one-to-four unit dwellings. It can also be used for condos, though restrictions apply.
Can nonresidential (storefront) property be eligible for a 203k insured loan?
Yes. Mixed-use residential property is acceptable provided the property has no greater than 25% (for a one story building); 33% (for a three story building); and 49% (for a two story building) of its floor area used for commercial (storefront) purposes. The rehab funds can only be used for the residential functions of the dwelling and areas used to access the residential part of the property.
Can HUD-owned properties be purchased using the 203k loan?
Yes. However, the property must be advertised that it is eligible for financing with a 203k loan. If the HUD-owned property is purchased with other funds, a 203k loan can be made after the property is in the buyer’s name. In this case, cash back will be allowed to the borrower for a period of six months from purchasing the HUD-owned property.
BORROWER ELIGIBILITY
Can an investor use the 203k program?
No. In October, 1996, the Department placed a moratorium on investor participation in the 203k Rehabilitation Mortgage Program.
Can a local government agency or a nonprofit organization use the 203k program?
Yes. The same qualification requirements will be used as for an owner-occupant of the property.
Is there a limitation on how many properties a person or organization can have in any area of the community?
Yes. A borrower can have not more than seven (7) units within a two block radius of the property they want to purchase. However, if the property is in a local community area that has been designated for redevelopment or revitalization, then this seven unit limitation does not apply.
ELIGIBLE IMPROVEMENTS
Can Section 203k be used to convert a one family dwelling to a two-, three-, or four-family dwelling (or vice versa)?
Yes, under the Standard (k) program.
Can Section 203k be used to move an existing house onto another site?
Yes, under the Standard (k) program, however, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation. At closing, funds would be released to purchase the site and the rest of the mortgage proceeds would be placed in the Rehabilitation Escrow Account. The borrower would have the site prepared to accept the dwelling. The first release would be based on the improvements made to the site, including the installation of the existing structure on the new foundation.
Can a detached garage or another dwelling be placed on the mortgaged property?
Yes, under the Standard (k) program, however, a new addition must be attached to the existing dwelling, and must comply with HUD's Minimum Property Standards in 24 CFR 200.926d and all local codes and ordinances.
Can a dwelling be converted to provide access for a disabled person?
Yes. A dwelling can be remodeled to improve the kitchen and bath to accommodate a wheelchair access. Wider doors and handicap ramps can also be included in the cost of rehabilitation.
PROGRAM QUESTIONS
What is the minimum amount of rehabilitation required for a non-streamlined Section 203k mortgage?
There is a minimum $5,000 requirement for the eligible improvements on the existing structure on the property. Minor or cosmetic repairs by themselves are unacceptable; however, they may be added to the minimum requirement. Under the Streamlined 203k program, a minimum repair/improvement cost requirement is not applicable.
Is there a time period on the rehabilitation construction period?
Yes, the Rehabilitation Loan Agreement contains three provisions concerning the timeliness of the work. The work must begin within 30 days of execution of the Agreement. The work must not cease prior to completion for more than 30 consecutive days. The work is to be completed within the time period shown in the Agreement (not to exceed six months); the lender should not allow a time period longer than that required to complete the work.
What happens if the borrower fails to perform under the terms of the Agreement?
The lender may refuse to make further releases from the Rehabilitation Escrow Account. The funds remaining in the account can be applied to reduce the mortgage principal. Also, the lender has the option to call the mortgage loan due and payable.
Does HUD always require a contingency reserve to cover unexpected cost increases?
Typically, yes. On properties older than 30 years and over $7,500 in rehabilitation costs, the cost estimate must include a contingency reserve. The reserve must be a minimum of ten (10) percent of the cost of rehabilitation; however, the contingency reserve may not exceed twenty (20) percent where major remodeling is contemplated. If utilities were not turned on for inspection, a minimum fifteen (15) percent is required.
Can the architectural exhibits, including the cost estimate, be modified after the mortgage loan is closed?
Yes. The changes must be approved by HUD or a DE lender prior to beginning the work. If the change affects the health, safety or necessity of the dwelling, the contingency reserve can be used to pay for the change. However, if the health, safety or necessity of the dwelling is not affected and an increase in cost occurs, the borrower must apply monies into the contingency reserve fund to pay for the change. Should the change result in a reduced cost of rehabilitation, the difference will be placed in the contingency reserve fund; if unused, it will be applied as a mortgage prepayment after completion of construction.
What happens if the cost of the rehabilitation increases during the rehabilitation period?
Can the 203k mortgage amount be increased to cover the additional expenses? No. This emphasizes the importance of carefully selecting a contractor who will accurately estimate the cost of the improvements and satisfactorily complete the rehabilitation at or below the estimate.
Can a Section 203k mortgage be an Adjustable Rate Mortgage?
Yes. An Adjustable Rate Mortgage is available to an owner-occupant only. Non-profits are not eligible for an ARM.
Can mortgage payments (PITI) be included in the mortgage?
Yes, under the Standard (k) program. Up to six months of payments may be included in the mortgage if the property is not able to be habitable due to condition of the property during the rehabilitation period.
Can cost savings on the rehabilitation be given back to the borrower?
No. However, the savings can be transferred to cost overruns in other work items or can be used to make additional improvements to the property. If the cost savings are not used, the money must be applied to the mortgage principal, but the mortgage payments will remain the same, because the loan has already closed. To use the cost savings, it will be necessary for a Change Order to be completed and approved by the lender.
Can the borrower do his/her own work write up and cost estimate?
Yes, but only under the Streamline (k) program.
Is only one appraisal required to establish the "after-rehab" value of the property?
Yes, provided the lender can be assured that the contract sales price is reasonable for purchase transactions or the existing debt on the property is low enough to assure a good equity position of the homeowner.
Can an Energy Efficient Mortgage (EEM) be allowed using the 203k program?
Yes. A borrower can finance into the mortgage 100 percent of the cost of eligible energy efficient improvements, subject to certain dollar limitations, without an appraisal of the energy improvements and without further credit qualification of the borrower.
What is a streamline 203k mortgage?
HUD has developed an FHA insured mortgage, called the “Streamline (K)” Limited Repair Program that permits homebuyers to finance an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser.
