FHA 203K Rehab Loan

South side La Jolla Cove San Diego, California

"I had all but given up on a planned room addition. Then I found Greg when interviewing for the HUD Consultant position. All I can say is "Wow, what a difference he made". He was creative, sensible, and very solution-oriented. Now I have my room addition, but 100% due to Greg's input. What a great guy, and now he's a good friend as well".     Rich M. Spring Valley, CA

203k Basics


FHA has been around for a long time and if you have ever had or heard of an FHA loan you were hearing about the 203(b) loan. The 203k is just a little farther down in the Section 203 loan list. The 203k loan is a fully disbursed loan which allows a borrower to purchase or refinance a property and finance the cost of rehabilitation with one loan. Because it is fully disbursed at closing, the 203k loan can be insured by HUD as soon as the loan closes.The mortgage amount for these loans is based on the projected value of the property with the work completed, taking into account the cost of the work. HUD has taken a strong position to encourage this program and the loan is now easier to originate and close than ever before. Use a consultant. A 203k loan can close as fast as the lender can close a 203b loan.

203k Advantages

  • Up-front MIP can be financed into the loan
  • Non-profit organizations are eligible with only 5% down payment and can buy multiple properties
  • Finance up to 6 months mortgage payments
  • Special HUD down payment programs exist
  • Most closing costs can be financed
  • An FHA loan is assumable

Streamlined 203k

The Streamlined 203k is a newer product which was intended to save the buyer or homeowner money by not requiring a ‘consultant’ for the bid specifications. It allows a contractor to bid the project provided the work is relatively simple and is less than $35,000 in scope of work. However, a plan review is required.

What items remain ineligible for the Streamlined (k) program?

Properties that require the following work items are not eligible for financing under the Streamlined (k):

  • Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall; 

  • New construction (including room additions);Repair of structural damage

  • Repairs requiring detailed drawings or architectural exhibits;

  • Landscaping or similar site amenity improvements

  • Any repair or improvement requiring a work schedule longer than six (6) months

  • Rehabilitation activities that require more than two (2) payments per specialized contractor

  • Necessitate a “consultant” to develop a “Specification of Repairs/Work Write-Up”

  • Require plans or architectural exhibits

  • Mixed Use properties - You can renovate a mixed use property provided the commercial space represents less than one floor of the structure. The commercial uses cannot affect the health and safety of the occupants

There is a minimum requirement of $5,000 in eligible (necessary) improvements on the subject property. Improvements to a detached garage, a new detached garage, or the addition of an attached unit (if allowed by local zoning ordinances) can also be included in this first $5,000. * The look a likes have no minimum amount of rehab. ** Read this carefully - this minimum has been removed... there is no minimum amount of rehab now...2008

The mortgage must include one or more of the items listed below:

  • Structural repairs and alterations.
  • Items such as additions to the structure; repairing any and all structural damage.
  • Improvement in the functionality or modernization.
  • Such items as remodeled kitchens and bathrooms.
  • Changes for aesthetic appeal, and the elimination of obsolescence.
  • New exterior siding and new doors.
  • Repair of replacement of plumbing, heating, air conditioning or electrical system. Installation of new plumbing fixtures are acceptable, including interior whirlpool bathtubs.
  • Installation of Well and/or Septic System.
  • Must be installed or repaired prior to beginning any other repairs to the property. Properties less than one acre in size can be limited on this item.
  • Replacement of flooring, carpeting or tiling.
  • Energy conservation improvement.
  • New dual pane windows and doors, storm windows, insulation, and solar domestic hot water systems.
  • Major landscape work and site improvement.
  • Patios and terraces that improve the value of the property equal to the cost, or that are needed to preserve the property from erosion.
  • Improvements for easier accessibility to the handicapped.
  • Handicapped retrofitting can be included in the cost of rehab. This is particularly good to get this information into the hands of vocational rehab companies and companies that deal with disabilities. They may have a list of clients for you.
  • The following items can be included in addition to the minimum $5,000 requirements:
  • New cooking ranges, refrigerators and other stand alone appliances.
  • Painting and other cosmetic repairs.
  • Fencing, new walks and driveways, and general landscape work trees, shrubs or seeding).
  • Repair of an existing swimming pool, up to $1,500. Any costs exceeding $1,500 must be paid into the Contingency Reserve by the borrower.

Which Properties are Eligible for the 203k?

1. Any one to four unit properties which have been completed (with a certificate of occupancy) for at least one year are acceptable according to the provisions of local zoning requirements.

2. Homes that have been demolished or razed as a part of the rehabilitation process can be rehabbed as long as the existing foundation system is not affected and remains in tact. (as long as there is a portion of the original foundation)

3. A home can be moved onto a foundation on the mortgaged property, provided the proceeds from the sale of the previous location are not released until the foundation is properly inspected and the home is satisfactorily attached to the new foundation.

4. Any property the buyer wishes to convert either from single family into a two-four family property (if zoning will allow the change) or from a two to four family dwelling into a single family unit. Let’s take this one a little farther - You can take a 5-8 plex and turn it into a 1-4 unit. i.e..... Make an 8 plex into a fourplex and use this program.

5. A manufactured home that was built AFTER June 15, 1976, and has been on a permanent foundation for over one year is eligible, provided the unit must have been delivered to the site when it was new, prior to being occupied.

6. A 203k can be used on a "mixed use residential property” provided it meets the following requirements:

The floor space used for commercial purposes does not exceed...

25% for a one story building

33% for a three story building

49% for a two-story building

  • The commercial use must not affect the health and safety of the residential occupants.
  • The rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.

203k "Look-A-Likes" for INVESTORS

Investors can purchase SFRs with 20% down on the purchase price plus the rehab amount. This gives you a loan amount up to 95% of the after improved loan amount. Find a buyer that has the 5% down payment and qualifies with the lender...close the home with a one time assumable loan and get your funds released from escrow. No additional appraisal is needed. This is the FNMA "Home Style" loan and the old "escrow commitment procedure" works on it.

INVESTORS… How about ZERO DOWN? If your credit is good we have lenders that will loan up to 80% of the "after improved value" on an investment property up to four units. That means that if you find a property for $100,000 with a construction amount of $100,000, as determined by an appraisal and in conjunction with the same report we use for the 203k, and an "as improved value" of $300,000, based on an appraisal by one of our approved associates you could get 100% of the purchase and rehab and up to $10,000 of your closing costs financed. That means; NOTHING DOWN