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Buying a home with a 203(k) Loan

Don’t Say “No!” Just Because the Home Needs Some Work!

The 203(k) program attempts to revitalize communities and expand homeownership opportunities. It is the Federal Housing Administration’s program for the rehabilitation and repair of single family properties.

When you buy a home, most mortgage financing is based on the appraised value of the property. If a property requires repair, the homebuyer usually has to obtain financing first to purchase the dwelling and then additional financing (usually at a high interest rate) to do the construction.  



What can a 203(k) be used for?

203(k) loans can really make a huge difference for the homebuyer.  With many foreclosures being vandalized, a 203K loan is the ideal tool to buy a home and be able to fix it up to bring it back to market level.  With a 203(k) loan, the borrower can get just one mortgage loan to finance both the purchase and the rehabilitation of the home.  The mortgage amount is based on the projected value of the property with the work completed, rather than just the appraised value. 203(k) can be used to purchase any one- to four-family dwelling that has been completed for at least one year. Homes that have been demolished, or will be demolished as part of the rehabilitation work, are eligible provided some of the existing foundation system remains in place. 203(k) can also be used to convert a one-family home to a two-, three-, or four-family dwelling or to decrease a multi-family dwelling to a single family home. Condominiums can be purchased with 203(k) loans with some restrictions. Only the owner/occupant is eligible for the loan and the planned rehabilitation must be limited to the interior of the unit.

 Improvements considered “luxury” improvements are not eligible but painting, room additions, decks are all eligible. All properties purchased with 203(k) funds must meet energy conservation standards and must meet smoke detector standards. These loans are also available for investors but at a higher interest rate.  

How does it work?

You’ll need to find a Renovation Loan Specialist who can help you out.  Here in NJ they will do an appraisal on the property and determine what the value will be based on the repairs.  Once a value has been determined above the sale price, you’ll have X amount of funds to use towards the renovations.  All the work must be done by a state certified contractor.  You submit the bills to the bank and they will pay the contractor.  

What do you do next?

If you’ve found a home that you love, your real estate professional will help you to execute a Sales Contract including a contingency upon the loan approval of your Section 203(k) financing.

At loan closing, the mortgage proceeds will be disbursed to pay off the seller of the existing property and the Rehabilitation Escrow Account will be established. As construction progresses, funds are released after the work is inspected by a HUD-approved inspector. When all work is completed, you will provide a letter indicating that all work is satisfactorily complete and ready for final inspection.  If there are unused contingency funds or mortgage payment reserves in the Account, the lender must apply the funds to prepay the mortgage principal.

Using a 403(k), you could buy a fixer-upper and end up with the nicest home on the block!


For more information:

Dear TZ – I found a great house but it needs a lot of work. Can a 203k help me?

Applying for a 203K loan


What every Homebuyer needs to know about 203k

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