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When FHA Assists Your Property Rehab

Posted February 12, 2010 by Matthew Denton

For those buying fixer uppers, FHA is ready to help you.

My college buddy phoned me last week and asked me if there’s anything that I can do about her plans of buying a foreclosed run down home. I said it’s a good idea but she quickly cut me by asking how she can find better financing to fix the house. I knew what she needed: a 203(k) financing from the Housing and Urban Development.

The Section 203(k) of the National Housing Act or Rehabilitation Mortgage Insurance is an FHA mortgage loan that includes a loan for property repairs in the FHA federally-insured loan. So instead of the homebuyer providing a separate amount for repairs and improvements, the FHA can grant a minimum of $5,000 of the total loan that must be used to rehab the property.

Most FHA loans apply a “health and disability” standard to the appraisal process but the 203(k) financing is an exception. To determine the loan amount, the FHA determines the after-improved appraised home value. Borrowers can receive up to 110 percent of this value as their loan.

The HUD lists the following types of home improvements that may qualify:

• Structural alterations and reconstruction.
• Modernization and improvements to the home’s function.
• Elimination of health and safety hazards.
• Changes that improve appearance and eliminate obsolescence.
• Reconditioning or replacing plumbing; installing a well and/or septic system.
• Adding or replacing roofing, gutters, and downspouts.
• Adding or replacing floors and/or floor treatments.
• Major landscape work and site improvements.
• Enhancing accessibility for a disabled person.
• Making energy conservation improvements.
• Eligible Streamlined (k) improvement and/or repairs.

The work has to be completed within six months after the escrow closes. The required repairs have to be also identified during the inspection. Some borrowers prefer to pay at most, six months of mortgage payments at the end of the loan if they live in another home while the purchased property is being renovated.

But not everything can go on as expected. If you’re a buyer competing against a real estate investor who’s ready to pay the seller 100 percent cash, it’ll be difficult for you to land on a deal. This is often the problem among buyers armed with a possible 203(k) financing. Also, if you wish to move in right away in the house, you might have to think twice about it first. Contractor work delays can get in your plans of living in the house the earliest time possible.

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