| 203(K) - How is it different
When a wants to purchase a house in need of
repair or modernization, the homebuyer usually has to obtain financing first to purchase
the dwelling; additional financing to do the rehabilitation construction; and a permanent
mortgage when the work is completed to pay off the interim loans with a permanent
mortgage. Often the interim financing (the acquisition and construction loans) involves
relatively high interest rates and relatively short amortization periods. The Section
203(k) program was designed to address this situation. The borrower can get just one
mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition
and the rehabilitation of the property. To provide funds for the rehabilitation, the
mortgage amount is based on the projected value of the property with the work completed,
taking into account the cost of the work.
How the Program can be used
This program can be used to accomplish
rehabilitation and/or improvement of an existing one-to-four unit dwelling in one of three
ways:
To purchase a dwelling and the
land on which the dwelling is located and rehabilitate it.
- To purchase a dwelling on another site, move
it onto a new foundation on the mortgaged property and rehabilitate it.
- To refinance existing indebtedness and
rehabilitate such a dwelling.
Eligible Improvements
Mortgage proceeds must be used in part for
rehabilitation and/or improvements to a property. There is a minimum $5000 requirement for
the eligible improvements on the existing structure(s) on the property. Rehabilitation or
improvements or improvements to a detached garage, a new detached garage, or the addition
of an attached unit(s) (if allowed by the local zoning ordinances) can also be included in
this first $5000. Properties with separate detached units are acceptable, however, a newly
constructed unit must be attached to an existing unit to be eligible under 203(k).
Any repair is acceptable in the first $5000 requirement that may affect the health and
safety of the occupants. Minor or cosmetic repairs by themselves cannot be included in the
first $5000, but may be added after the $5000 threshold is reached.
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