Rehab Mortgage – what is an FHA 203K?

Home renovations can be daunting, but financing them doesn’t need to be.  Homebuyers considering a fixer-upper and home owners thinking about doing major rehab work might want to consider an FHA 203K loan.

Often called rehab or renovation loans, 203K loans differ from traditional mortgage loans.  Buyers who want to purchase a home in need of repair usually have to secure a loan to buy the property, get additional financing to complete the renovation and then get a permanent mortgage to pay off the interim loans.  203K loans, however, are made based on the after-repair value and include an escrow account, in which the money is dispersed in draws as the necessary renovations are being completed.

Renovation loans can be used in three ways: to purchase an existing home (and the land attached to it) and renovate it; to pay off existing debt on a current residence and renovate it; or to purchase an existing property and move it to a new piece of land.  The types of improvements allowed on 203K loans are extensive – painting, room additions, decks, bathroom and kitchen remodels, and even going green.  Luxury items and improvements are generally not eligible.

Homebuyers need to work closely with their REALTOR as well as a contractor to get a detailed statement about the extent and general cost of the rehab work and the expected market value of the property after the completion of the work.  After finding a HUD-approved lender – not all banks administer these loans – and inspections and appraisals, the work can begin.  For more information, go to www.hud.gov.

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