203K Rehab Loans insured by FHA can be used to rehabilitate or renovate single-family or multi-family residential properties. The 203K loan property eligibility guidelines and requirements are a bit different from the more popular section 203(B) loan also insured by the FHA for residential homes. The majority of mortgage financing programs offered by government agencies and private lenders are permanent in nature. This basically means that the typical mortgage loan lender requires the property to be in habitable condition to act as a sufficient surety with no major or minor deficiencies. In cases where such repairs are outstanding, the lender will not make a loan. The borrower will have to rely on high interest and short term real estate loans offered by private hard money lenders to acquire and repair the property before a mortgage lender can make a long term loan with favorable loan terms. The FHA section 203(K) loans offered since 1978 fills this void by facilitating the acquisition and renovation of properties in need of repair work through a single loan with very reasonable interest rates and loan terms.
203(K) Residential Property Guidelines
To qualify for a 203K renovation home loan, the property to be financed must be zoned residential. The number of units in the property can be from 1 – 4. Therefore single-family, duplex, triplex and even fourplex zoned properties can be financed through a 203K loan. The properties must have been completed for at least a year. Any newly constructed units must be attached to the existing structure that fulfills these requirements. Co-op units are not eligible for financing either on a new purchase or refinance through a 203K rehab mortgage loan.
An unfinished or incomplete residential property cannot be eligible to be financed with a 203(K) loan. The property guidelines and requirements provided by FHA won’t allow for the financing of such unfinished and never before occupied properties. The construction and outstanding work must have been deemed completed for at least an year. To establish this provision regarding proof of completion for one year, an occupancy certificate issued by the local authorities might be needed.
In case of residential properties that have under gone demolition already or those that will be put through as a part of the renovation and rehabilitation work, 203K insured loans can be still used to finance them as long as the previously existing foundation is unaffected and will be used. In such cases, a qualified and licensed residential structural engineer needs to certify that the existing foundation is in sound condition to support the construction of the new dwelling or structure as a part of the proposed 203K property plans. In cases where the foundation is damaged or destroyed, a 203(B) construction loan might be a suitable option.
FHA Property Unit-Conversion Guidelines for 203(K) Loans
A 203(K) loan, as mentioned earlier, only allows for the financing of residential homes. This doesn’t mean just single-family homes. Even homes with up to four (4) units are eligible for these renovation loans. If the proposed work involves conversion of a property into more units (<4) or less units (<4), the 203K mortgage financing can still be availed. So using this government insured loan program a home owner can convert their one-unit single family home into a duplex, triplex or fourplex. Similarly, an existing multi-unit also can be transformed in to a one- to four-family residential home.
203(K) Manufactured (Mobile) Home Guidelines
In addition to the regular structures, even mobile or manufactured homes are eligible to be rehabbed with a 203(K) loan for purchase or refinance transaction. The FHA property guidelines under section 203K mandate that the property be built after June 15th, 1976. It is also required that the manufactured home exist on a solid permanent foundation for at least an year. The unit must have been new when it was brought on to the site, prior to its occupancy. Moreover, the rehab work involved shouldn’t involve any structural components of the mobile home and must be in conformity with the Federal Manufacturers Construction and Safety Standards.
Relocation of a Residential Dwelling
If a borrower would like to move an existing dwelling from one site to another site with foundation, the total cost involved can all be financed through a FHA-insured 203(K) rehabilitation/renovation loan. Before the structure on the non-mortgaged site can be moved on to the new foundation, a thorough and proper inspection must be performed. The funds for the structure to be moved from the non-mortgaged property location will only be released after this inspection assures that the dwelling is appropriately placed and secured to the new foundation.
Condo Guidelines for HUD/FHA 203 (K) Insured Renovation Loans
Residential Condos are also eligible for rehab loans through the 203k regular or streamlined program offered by the Federal Housing Administration. There are certain restrictions when it comes to 203k condo rehab loans. The rehabilitation work to be undertaken is restricted to the interiors of the property. Common areas and exteriors of the condo unit, which are the responsibility of the condominium association, cannot be rehabbed with a 203k loan. At any given time only the lesser of five (5) units or 25% of the total units in the condominium association can be undergoing rehab work at a given time.
The maximum mortgage amount that will be approved for a condo rehab cannot exceed more than 100% of the after-improved value. The total number of individual units in a building within the condominium enclave cannot be more than four units to get funding through a 203k residential rehab loan. This restriction is based on the FHA Guideline that stipulates only 1-4 unit residential properties are eligible for its loan insurance. This guideline doesn’t restrict the whole condominium to have just four units nor that all the buildings need to be detached completely. A condo project can have 10 individual buildings with four units in each one. When the buildings are attached in case of row houses, each of the units must be separated by at least a 1.5 hr. firewall from top to bottom.
The condo project must be approved by FHA for individual units to qualify for 203k rehab financing.
Mixed-Use Property Loan Guidelines
It can definitely be said that 203(k) mortgages are quite flexible with regards to the types of residential properties that are allowed to be financed under this FHA insured program. In addition to residential homes, mobile homes and condos, even mixed-use properties are also qualify for a 203k loan. If the mixed-use property has three floors, then only 33% of the building must be used for commercial purposes whereas it can 49% for a two-storey building and 25% for a single-storey structure.
The business carried out in the commercial portion of the building shouldn’t pose any risk to the health and safety of the residential occupants. The rehabilitation funds released by the 203(K) lender must only be used for the residential portions.
The above 203(K) property guidelines and requirements are important for borrowers seeking a rehabilitation loan on a residential, condo or mixed-used property. For further reference please check out the FHA website and HUD handbook. In addition to these general property guidelines, getting familiarized with other 203(K) guidelines and requirements related appraisals, credit, income can be really beneficial to borrowers to effectively secure rehab financing for purchase or refinance of their residential property.