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How different is a FHA 203(K) rehab loan from other conventional residential real estate loans?

The FHA 203(K) mortgage loan is quite different from other home loans in scope, objective and structure. The most prevalent and common mortgage financing programs offered by mortgage lenders and banks are based on the guidelines of government sponsored agencies such as Fannie Mae, Freddie Mac and Ginne Mae. These conventional mortgage lending programs mostly offer permanent real estate financing only. This basically means that a home lender will not close a loan and disburse the mortgage settlement funds unless the subject residential property is in good and habitable condition. They simply don’t consider a property for financing if it needs any rehabilitation, renovation or repairs. The home lender expects these deficiencies to be cured and any necessary improvements be made before the borrower proceeds to seek a long-term mortgage on the residential property.

There are great deals on residential properties among the nation’s foreclosure and bank REO listings. If a new homebuyer would like to purchase one of these houses that very likely will need repairs to bring to good condition, he/she needs to first obtain financing to acquire the property, and then they need to get another loan to finance the repair work. After all the rehab work is completed, they need to seek a permanent mortgage loan from a traditional lender. The first two steps involve acquisition and renovation which are usually financed only by hard money rehab lenders. These private investors are primarily asset based lenders who charge excessive interest rates and have loan terms that are very restrictive.

With a FHA 203(K) loan, the homebuyer can conveniently handle all the three steps outlined above with one single loan. The borrower will get the funds for both buying and renovation at a attractive interest rate. In most cases this interest rate is just .5% more than the interest rate on section 203(B) FHA loans. The necessary funds for rehab repairs are provided as the 203(K) guidelines allow the project value after repairs to be used as the basis to determine the LTV(loan-to-value).

As soon as the loan closing occurs, the funds for the purchase or refinance are disbursed. An interest bearing escrow account is set up to handle the funds related to renovation work. The FHA approved lender immediately seeks the endorsement of HUD, which gives them a fully insured 203(K) loan for the mortgage amount approved. All these unique factors make a 203(K) loan much different from all the conventional mortgage loans offered on residential properties.