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HUD’s 203(k) Program
HUD’s main program for the repair and rehabilitation of single family properties is the Section 203(k) program. Section 203(k) is an FHA mortgage insurance that allows homebuyers in Alabama to finance both the purchase of a house and the costs of rehabilitation through one single home loan.
FHA’s 203(k) program satisfies an important and unique need for homebuyers in Alabama. If you go to purchase a home that needs repairs, you must often undergo a very costly and complicated process. In order to finance both the house and the repairs you may find yourself needing to get a loan for the purchase of the home and a secondary loan for the repairs. These secondary loans are often difficult to acquire (especially with lack of collateral), have high interest rates, and have short repayment terms. The 203(k) program offers a solution to this problem that benefits both the lender and the borrower by insuring a single long-term loan to cover both the purchase of the home and the costs of repairs. Section 203(k) insured loans protect the lenders by insuring the loan even before the condition and value of the property provide adequate security on the loan. They also can save you the borrower a lot of time and money.
Although there are some restrictions and requirements to the repairs and rehabilitation that can be done and/or must be done, the repairs to the home being purchased can range from relatively minor to a near reconstruction (providing that the foundation system remains in place). The 203(k) program requires that the rehabilitation costs be at least $5000, however the total value must not exceed the FHA mortgage limit for the area. There are two ways to determine this value: (1) add the value of the property before the rehabilitation and the cost of the rehabilitation or (2) calculate 110% of the appraised value after the rehabilitation is complete. The lesser of the two is the one used. The 203(k) program also requires that the house be at least one year old.
Improvements that can be made with 203(k) financing:
• Reconstruction and structural alterations
• Elimination of safety and health hazards
• Modernization and improvements to the home’s function
• Replacing or reconditioning plumbing
• Installation of a septic system or well
• Changes that eliminate obsolescence and improve appearance
• Adding or replacing floors and/or floor treatments
• Adding or replacing roofing, gutters, and downspouts.
• Enhancing accessibility for a disabled person
• Making energy conservation improvements
• Major landscape work and site improvements.
When rehabilitating a home with the 203(k) program HUD requires that certain basic energy efficiency and structural standards be met.
Luxury items and improvements that do not become a permanent part of the real property are not eligible as rehabilitation under the 203(k) program. However the 203(k) program can be used to cover such items as room additions, painting, decks and other items even if the home does not need any other improvements. All health, safety, and energy conservation repairs and improvements must be addressed before completing general home improvements.
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