The 203(k) loan is the U.S. Department of Housing and Urban Development’s (HUD) answer to a problem that often faces prospective homeowners who fall in love with a home that needs some fixing up. With conventional loans, banks often require that repairs be complete before making the loan to purchase the home.
This requires the prospective owner to look for construction loans from lenders that don’t want to make a loan for repairs and renovations on a property that the borrower doesn’t own. If they qualify for the construction loan, the interest rate is often higher and the timeframe to pay back the loan, short.
The 203(k) loan is HUD’s answer to that problem. It combines the loan for the purchase or refinance of the property with a construction loan for repairs and renovations of the same property.
Just like an FHA loan, there are requirements and limitations. Among the most notable:
1) Once renovations are complete, you have to occupy the home. No investment properties allowed.
2) Single family homes as well as property with up to four units are allowable. You may also convert a single structure down to four units or less. Condominiums are allowable for improvement of the interior only.
3) Properties that function as both residential and commercial property are eligible providing that no more than 25 percent of the space of a one story building is used for commercial (storefront) purposes. Two and three story buildings have different percentage requirements. Find those on the HUD website at the address below.
4) No luxury renovations are permitted. For example, adding a pool would probably not be allowable. Most other renovations, including the addition of extra space, are permitted.
5) All work must be completed in a manner that addresses energy efficiency and building codes.
6) Work has to be completed by licensed contractors. Homebuyers may only perform the work if they can demonstrate professional expertise. They may not, however, charge labor for the work.
7) Cost estimates can come in any format but must be itemized and include a description of the work.
If you meet the requirements for an FHA loan, you likely qualify for a 203(k) loan.
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