The FHA 203(k) Program – How It Is Different From a “Regular” Mortgage

The FHA 203(k) program is different than most other home mortgage financing options in that the 203(k) loan accounts for the value that the house is *going to be worth* once repairs are done.
There are 3 eligible situations where an FHA 203(k) mortgage can be done:

1. To purchase a house on a plot of land and rehabilitate it (the most common)
2. To purchase a house on another site, move it onto a new foundation on the mortgaged property and rehabilitate it (less common)
3. To refinance an existing mortgage and rehabilitate such a dwelling (also less common)

Without the 203(k) program, if you wanted to buy a house that needed repairs (the most common situation) or you just wanted to modernize the house – you would first have to obtain a mortgage on the as-is condition and value of the home, go out and find additional financing (HELOC, 2nd mortgage, your mother-in-law), improve the house and then get your ideal long-term mortgage in place.

Let’s say for a moment that the 203(k) program didn’t exist. That means if you wanted to buy a house that needed landscaping, drywall work, new carpet and new kitchen counters you would have to:

• Have to get one loan to buy the house originally
• Have to get another loan to pay for the repairs
• Have to get another loan (hopefully the last one!) that covers the value of the house after the repairs are done
• Hope that the value of the house after the repairs are done is more than enough to cover the loan you had to take out in #1 and #2

One of the problems I have seen with the above financing plan is that I don’t know which is worse – trying to find a lender that will give you a 2nd mortgage or borrowing money from your mother-in-law!

For situations like this, HUD has designed the 203(k) program where you can get just one mortgage loan at a long-term-fixed rate (or ARM if you are going to occupy the property as your primary residence) where the value of the home is based on the projected value of the property when the work is completed and taking into account the cost of the work that is going to be done.

To get lenders to participate in the idea of lending money out on a property that is going to have work done on it, HUD has agreed to allow the loan to be insured as soon as the loan funds and an escrow account is set up for the repairs.