HUD Section 203(k) Loans to Purchase and Rehab Homes
The United States Department of Housing and Urban Development (HUD) has a home loan program that allows you to finance a home that needs repairs, fix it up, and only have one loan to deal with. In most cases with the traditional loan process, you would have to purchase the home, get a construction loan to make repairs, and then get a permanent long-term mortgage. Construction loans are generally short-term and made at a higher interest rate since they involve more risk.
“When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before a long-term mortgage is made.” (HUD.gov)
With HUD underwriting the loan, risk is minimized so the three loans can be made all in one home mortgage without the higher interest rates and the hassle of obtaining three separate loans. You will still need to qualify according to the guidelines of regular FHA loans, such as: credit score of ~580 or above, steady income source, and meet the debt-to-income ratio.
HUD does not make the 203(k) home loan directly to the consumer. Rather, it insures the loan made by a HUD-approved lender, such as National Home Finance.
How to use a HUD’s Section 203(k) loan program
You can use HUD’s Section 203(k) loan program to rehab a home several ways, allowing for a wide variety of uses. It is used by first-time home buyers, by experienced home buyers, and by rehabbers / investors looking to develop a community. The 203(k) rehab loan can also be combined with other existing programs, such as HUD’s HOME, HOPE and Community Development Block grants.
The home you choose to purchase and rehab must meet certain guidelines:
- It must be a one- to four-family dwelling that has been completed for at least one year
- The property must pass all local zoning laws
- If the existing foundation remains in place, even a demolished home can qualify
- An existing house or modular home can be moved to the purchased property with certain stipulations, including a new or existing foundation
- Can be a mixed-use (commercial and residential) property, providing that only certain percentages are for used for commercial purposes, while the rest is used for residential (25% commercial for one-story; 33% commercial for three-story; 49% commercial for a two-story building)
- May also be used to purchase existing individual condominium units approved by the FHA
Once all safety, energy conservation, and health issues meet required standards, other repairs can be “enhancements,” such as: adding decks, painting, room additions, and more.
You can purchase a rehab property with cash and refinance with a 203(k) fixer-upper home loan as if it were your original loan, but you must obtain the 203(k) within six months of the original purchase date.
An appraiser will determine the After-Improved Value and, in some cases, the “As-Is” Value. After-Rehabilitation Value will be the expected market value of a property after all improvements and additions have been made.
Once you have located a property that you would like to fix up and finance with a 203(k) home loan, the next step in the multi-step process is to conduct a feasibility analysis. This is best done with the assistance of a trained professional. This analysis should include:
- The extent of rehabilitation work that will be required
- Rough cost estimate of work that will be required
- Estimated value of the property after the required work is complete
Contact your National Home Finance (NHF) experts today at 800.324.4415 to learn more about HUD’s Section 203(k) residential loan program. Email NHF at [email protected]. This program is available in all states, including North Carolina and Florida.
Rehab a Home with HUD’s 203(k), HUD.gov