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FHA 203-k loan - Questions & Answers
1) Is the FHA 203k mortgage loan program restricted to single-family dwellings? No. The FHA 203-k mortgage program can be used
for one-to-four unit dwellings. Maximum mortgage limitations are the same as for properties under Section 203(b).
2) Can the FHA 203k loan be used to improve a condominium unit? Yes, however, condominium rehabilitation is subject to the
a) Owner/occupant and qualified non-profit borrowers only;
b) Rehabilitation is limited only to the interior of the unit. Mortgage proceeds are not to be used for the rehabilitation of exteriors or other
areas which are the responsibility of the condominium association, except for the installation of firewalls in the attic for the unit;
c) Only the lesser of five units per condominium association, or 25 percent of the total number of units, can be undergoing rehabilitation at
any one time;
d) The maximum mortgage amount cannot exceed 110 percent of after-improved value. After rehabilitation is complete, the individual
buildings within the condominium must not contain more than four units. By law, FHA 203k loans can only be used to rehabilitate units in
one-to-four unit structures. However, this does not mean that the condominium project, as a whole, can only have four units or that all
individual structures must be detached. Example: A project might consist of six buildings each containing four units, for a total of 24 units in
the project and, thus, be eligible for an FHA 203k loan. Likewise, a project could contain a row of more than four attached townhouses and
be eligible for a FHA 203k loan because HUD considers each townhouse as one structure, provided each unit is separated by a 1 1/2 hour
firewall (from foundation up to the roof). Similar to a project with a condominium unit with a mortgage insured under Section 234(c) of the
National Housing Act, the condominium project must be approved by HUD prior to the closing of any individual mortgages on the
3) Can a FHA 203k loan be used to convert a one family dwelling to a two-, three-, or four-family dwelling (or vice versa)? Yes.
4) Can a FHA 203k loan be used to move an existing house onto another site? Yes, 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.
5) What eligible home improvements are acceptable under the $5,000 minimum requirement?
a) Structural alterations and reconstruction (e.g., repair or replacement of structural damage, chimney repair, additions to the structure,
installation of an additional bath(s), skylights, finished attics and/or basements, repair of termite damage and the treatment against termites
or other insect infestation, etc.).
b) Changes for improved functions and modernization (e.g., remodeled bathrooms and kitchens, including permanently installed appliances, i.
e., built-in range and/or oven, range hood, microwave, dishwasher).
c) Elimination of health and safety hazards (including the resolution of defective paint surfaces or lead-based paint problems on homes built
prior to 1978).
d) Changes for aesthetic appeal and elimination of obsolescence (e.g., new exterior siding, adding a second story to the home, covered
porch, stair railings, attached carport).
e) Reconditioning or replacement of plumbing (including connecting to public water and/or sewer system), heating, air conditioning and
electrical systems. Installation of new plumbing fixtures is acceptable, including interior whirlpool bathtubs.
f) Installation of well and/or septic system. The well or septic system must be installed or repaired prior to beginning any other repairs to the
property. A property less than 1/2 acre with a separate well or septic system is not acceptable; also, a property less than 1 acre with both a
well and a septic system is unacceptable. Lots smaller than these sizes, usually have problems in the future; however, the local HUD Field
Office can approve smaller lot size requirements where the local health authority can justify smaller lots. The installation of a new well or the
repair of an existing well (used for the primary water source to the property) can be allowed provided there is adequate documentation to
show there is reason to believe the well will produce a sufficient amount of potable water for the occupants. (A well log of surrounding
properties from the local health authority is acceptable documentation.)
g) Roofing, gutters and downspouts.
h) Flooring, tiling and carpeting.
i) Energy conservation improvements (e.g., new double pane windows, steel insulated exterior doors, insulation, solar domestic hot water
systems, caulking and weather stripping, etc.).
k) Major landscape work and site improvement (e.g., patios, decks and terraces that improve the value of the property equal to the dollar
amount spent on the improvements or required to preserve the property from erosion). The correction of grading and drainage problems is
also acceptable. Tree removal is acceptable if the tree is a safety hazard to the property. Repair of existing walks and driveway is acceptable
if it may affect the safety of the property. (Fencing, new walks and driveways, and general landscape work (i.e., trees, shrubs, seeding or
sodding) cannot be in the first $5000 requirement.)
l) Improvements for accessibility to a disabled person (e.g., remodeling kitchens and baths for wheelchair access, lowering kitchen cabinets,
installing wider doors and exterior ramps, etc.). Related fixtures such as new cooking ranges, refrigerators, and other appurtenances, as well
as general painting are also eligible; however, it must be in addition to the $5,000 requirement.
6) Can a detached garage or another dwelling be placed on the mortgaged property? Yes, however, a new unit 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.
7) 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.
8) 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.
9) 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.
10) Does HUD always require a contingency reserve to cover unexpected cost increases? Yes.
11) How many draw releases can be scheduled during the rehabilitation period? As many as five releases (four plus a final) can be
scheduled. The number of releases is normally dictated by the cash-flow requirements of the contractor. An inspection is always required
with a scheduled release; however, inspections may be scheduled more often than releases if necessary to ensure compliance with the
architectural exhibits, HUD's Minimum Property Standards and all local codes and ordinances. If the cost of rehabilitation exceeds $ 10,000,
then additional draw inspections may be authorized under certain circumstances.
12) 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.
13) What happens if the cost of the rehabilitation increases during the rehabilitation period? Can the 203(k) 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.
14) How long will it take after the sales contract is signed to go to closing? If the cost estimates are completed within two weeks of
signing the sales contract, the loan should close within 60 to 90 days, assuming there are no title problems and, of course, you are qualified.
15) Can a FHA 203k loan be an Adjustable Rate Mortgage? Yes. An Adjustable Rate Mortgage is available to an owner-occupant only.
Investors and non-profits are not eligible for an ARM.
16) Can an investor use the FHA 203k loan program? No. In October, 1996, the Department placed a moratorium on investor
participation in the FHA 203k mortgage loan Rehabilitation Mortgage Program.
17) Can mortgage payments (PITI) be included in the mortgage? Yes. Up to six months of payments may be included in the mortgage
if the property is not occupied during the rehabilitation period.
18) Can a six (or more) unit building be done using the FHA 203k loan program? No. However, the building could be renovated and
reduced to a four unit building.
19) 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.
20) Is a contractor required to do the work? Yes
21) 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.
22) Can any rehabilitation money be paid upfront to offset the startup costs for the contractor? No. However, an exception can be
allowed for kitchen and bath cabinetry, or floor covering, where a contract is established with the supplier and an order is placed with the
manufacturer for delivery at a later date.
23) Is there anyone available who can prepare the Work Write-up and cost estimates? Yes. HUD allows fee inspectors to be an
independent consultant with the borrower. This is a time saver, because it can be completed in about two weeks. After this step is
completed, closing should occur within 60 to 90 days.
24) What is the definition of a First-Time Homebuyer? A single person or an individual and his or her spouse who have not owned a
home (as a tenant in common or as a joint tenant by the entirety) during the three years immediately preceding the date of application for the
FHA 203k loan. Any individual who is legally separated or divorced cannot be excluded from consideration, because the three-year waiting
period does not apply, provided the individual no longer has an interest in the home.
25) Can nonresidential (storefront) property be eligible for a FHA 203k mortgage 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.
26) Can HUD-owned properties be purchased using a FHA 203k mortgage loan? Yes. However, the property must be advertised that it
is eligible for financing with a FHA 203k loan. If the HUD-owned property is purchased with other funds, a FHA 203k loan can be made after
the property is in the buyers name. In this case, cash back will be allowed to the borrower for a period of six months from purchasing the
27) Can an Energy Efficient Mortgage (EEM) be allowed using the FHA 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.