FHA 203K Rehabilitation Loan
The FHA offers something known as the 203(K) Rehab loan, described on the FHA official site as, “the Department’s primary program for the rehabilitation and repair of single family properties. As such, it is an important tool for community and neighborhood revitalization and for expanding homeownership opportunities.”
The rules for an FHA 203(k) Rehab loan include restrictions on the type of property that can be rehabbed under this program, as well as requirements for the condition of properties that are eligible for the 203(k). Those restrictions include the number of units the property has–eligible homes may have one unit but no more than four, and the dwelling must have been completed for at least one year, according to FHA.gov.
Additionally, the number of units on the site “must be acceptable according to the provisions of local zoning requirements. All newly constructed units must be attached to the existing dwelling.” FHA loan rules add that cooperative units are not eligible for FHA 203(k) mortgages.
203(k) loans may be used for homes to be converted from a single-unit property to a multi-unit dwelling, or vice-versa. These loans are also permitted for “mixed-use” properties where there is a combination of residential and business use. In such cases, “A 203(k) mortgage may be originated on a `mixed use’ residential property provided:
(1) The property has no greater than 25 percent (for a one story building); 33 percent (for a three story building); and 49 percent (for a two story building) of its floor area used for commercial (storefront) purposes;
(2) the commercial use will not affect the health and safety of the occupants of the residential property; and
(3) the rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.”
There is an upfront (1.75%) and monthly (.85) obligation for MIP
FHA 203(k) loans are also available to qualified borrowers for properties that have been damaged or even destroyed – FHA loan rules say “Homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided some of the existing foundation system remains in place.”