According to the Department of Housing and Urban Development, a Section 203(k) fills a unique & important need for homebuyers. When buying a house that needs repair or modernization, homebuyers usually have to follow a complicated and costly process. The interim acquisition & improvement loans often have relatively high-interest rates, short repayment terms, and a balloon payment. However, Section 203(k) offers a solution that helps both borrowers and lenders, insuring a single, long term, fixed or adjustable-rate loan that covers both the acquisition & rehabilitation of a property. Section 203(k) insured loans save borrowers time & money. They also protect the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequate security.

 

Section 203(k) insures mortgages cover the purchase or refinancing and rehabilitation of a home that is at least a year old. A portion of the loan proceeds is used to pay the seller (or if a refinance, to pay off the existing mortgage), and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area — use this tool to determine what that value limit is. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.

 

The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. Section 203(k) insured loans can finance the rehabilitation of the residential portion of a property that also has non-residential uses; they can also cover the conversion of a property of any size from one to four-unit structure. The types of improvements that borrowers may make using Section 203(k) financing include:

 

• Structural alterations and reconstruction
• Modernization and improvements to the home’s function
• Elimination of health and safety hazards
• Changes that improve the 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

 

HUD requires that properties financed under this program meet certain basic energy efficiency and structural standards. Applications for a 203(k) can be found here, from FHA approved lenders.

 

Most times FHA loans are only ideal for those owner-occupied residences, due to the loan amount only being enough for a project up to a maximum of 4 units. For larger loans that can be approved 10x as fast with the least emphasis on personal credit can be found with Hard Money Loans. Usually, the process involves tracking down hard money lenders and pitching your idea. 

Instead, let lenders come to you by using Scout. Scout Hard Money is a marketplace where borrowers make a listing of their potential fix & flip. They’re able to answer all the questions every lender would ask them. With a few photos, this information is placed in front of thousands of different lenders at the same time. Although you’ll still hustle to get capital, you’ll rest assured knowing that there’s a place where lenders can look at your deal, create an offer, pre-qualify & message you, even while you sleep.