Questions and Anwers
Questions and Anwers Questions and Anwers

Questions and Answers

Rehabilitation Section 203 (k)

Mortgage Insurance


1.            Is the section 203(k) program restricted to single-family dwellings?

No.  The program can be used for one-to four unit dwellings.  Maximum mortgage limitations are the same as for properties under Section 203(b).


2.                   Can Section 203(k) be used to improve a condominium unit?

Yes, however, condominium rehabilitation is subject to the following conditions:

·         the unit must be located in an FHA-approved Condominium Project   and must comply with all other requirements for condominiums;

·         rehabilitation or improvements are limited to the interior of the unit, except for the installation of firewalls in the attic for the unit;

·         no more than five units per condominium association, or 25 percent of the total number of units, whichever is less, can undergo rehabilitation at any time; and

·         after rehabilitation is complete, the unit is located in a Structure containing no more than four units. For townhouse style condominiums, each townhouse is considered as one Structure, provided each unit is separated by a one and one-half hour firewall from foundation to roof;


3.                    Can Section 203(k) be used to convert a one family dwelling to a two, -three-, or four-family dwelling (or vice versa)?




4.                   Can Section 203(k) be used to move an existing house onto another site?


Yes.  However, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly place and secured to the new foundation.  At closing, funds would be released to purchase the site and the rest of the mortgage proceeds would be placed in a Rehabilitation Escrow Account.  The Barrower would have the site prepared to accept the dwelling.  The first release would be based on the improvements made to the site, including the installation of the existing structure on the new foundation.


5.                   What is the minimum amount of rehabilitation required for a Standard 203(k) mortgage?


There is a minimum $5000 requirement for the eligible improvements on the existing structure on the property.  Minor or cosmetic repairs by themselves are unacceptable; however, they may be added to the minimum requirement.



6.                   Can a detached garage or another dwelling be placed on the mortgaged property?


Yes.  However, a new unit must be attached to the existing dwelling, and must comply with HUD’s Minimum Property Standards.


9.            Is there a time period on the rehabilitation construction period?


Yes.  The Rehabilitation Loan Agreement contains three provisions concerning the timeliness of the work.  The work must begin within 30 days of execution of the Agreement.  The work must not cease prior to completion for more than 30 consecutive days.  The work is to be completed within the time period shown in the Agreement (not to exceed six months); the lender should not allow a time period longer than the required to complete the work.


10.          What happens if the Borrower fails to perform under the terms of the Agreement?


The lender may refuse to make further released from the Rehabilitation Escrow Account.  The funds remaining in the Account can be applied to reduce the mortgage principal.  Also, the lender has the option to call the mortgage loan due and payable.


11.               Does the rehabilitation construction have to comply with HUD’s Minimum Property Standards?


Yes.  The improvements must comply with HUD’s Minimum Property Standards (24 CFR 200.926d and/or HUD Handbook 4905.1) and all local codes and ordinances.



12.               Does HUD always require a contingency reserve to cover unexpected cost increases?


Typically, yes.  On properties older than 30 years and over $7500 in rehabilitation costs, the cost estimate must include a contingency reserve.  The reserve must be a minimum of ten (10) percent of the cost of rehabilitation ; however, the contingency reserve may not exceed twenty (20) percent where major remodeling is contemplated.  If utilities were not turned on for inspection, a minimum fifteen (15) percent is required.



13.               Can the architectural exhibits, including the cost estimate, be modified after the mortgage loan is closed?


Yes.  The changes must be approved by HUD or a DE lender prior to beginning the work.  If the change affects the health, safety or necessity of the dwelling, the contingency reserve can be used to pay for the change.  However, if the health, safety or necessity of the dwelling is not affected and an increase in cost occurs, the Borrow must apply monies into the contingency reserve find to pay for the change.  Should the change result in a reduced cost of rehabilitation, the difference will be placed in the contingency reserve fund; if unused, it will be applied as a mortgage prepayment after completion of construction.


14.               What happens if the cost of the rehabilitation increases during the rehabilitation period?


No.  This emphasizes the importance of carefully selecting a contractor who will accurately estimate the cost of the improvements and satisfactorily complete the rehabilitation at or below the estimate.


15.               How long will it take after the sales contract is signed to go to closing?


If the cost estimates are competed within two weeks of signing the sales contract, the loan should close within 30 to 45 days, assuming there are no title problems and, of course, your borrower is qualified.



16.               Does a Direct Endorsement lender who is approved for the 203(k) program need to be approved in another HUD office?


No.  However, the lender needs to submit their approval to the other HUD office where they wish to originate 203(k) loans.  A pre-closing review in the new HUD office will not be necessary.


17.               Can a DE lender sponsor a correspondent lend to originate 203(k) loans?


Yes.  The correspondent lender can even use the DE sponsor’s staff appraisers, inspectors and plan reviewer/consultants for processing.


18.               Can an investor use the 203(k) program?


No.  In October, 1996, the department placed a moratorium on investor participation in the 203(k) Rehabilitation Mortgage Program.



23.          Can mortgage payments (PITI) be included in the mortgage?


Yes. Only on the Standard FHA 203(k), up to six months of payments may be included in the mortgage if the property is not occupied during the rehabilitation period.


24. Can a six (or more) unit building be done using the 203(k) program?


No.  However, the building could be renovated and reduced to a four unit building.


25.          Can a dwelling be converted to provide access for a disabled person?


Yes.  A dwelling can be remodeled to improve the kitchen and bath to accommodate a wheelchair access.  Wider doors and handicap ramps can also be included in the cost of rehabilitation.


26.          Is a contractor required to do the work?


No.  However, if the borrower wants to do any work or be the general contractor, qualified to do the work, and do it in a timely and workmanlike manner.  It is very important that the work be done in a time frame that will assure the completion of the work that will be agreed upon in the Rehabilitation Loan Agreement (signed at closing).  A borrower doing their own work can only be paid for the cost of the materials.  Monies saved can be allocated to cost overruns or additional improvements.


27.         If the borrower does the work, how is the cost for work estimated?


The cost estimate must be the same as if a contractor is doing the work, in case the borrower cannot (for some reason) complete the work.


28.          Can cost savings on the rehabilitation be given back to the borrower?


                No.  However, the savings can be transferred to cost overruns in other work items or can be used to make additional improvements to the property.  If the cost savings are not used, the money must be applied to the mortgage principle, but the mortgage payments will remain the same, because the loan has already closed.  To use the cost savings, it will be necessary for a Change Order to be completed and approved by the lender.


29.               Can any rehabilitation money be paid upfront to offset the startup costs for the contractor?


On the Standard FHA 203(k), the answer is “No”.  However, an exception can be allowed for kitchen and bath cabinetry, or floor covering, where a contract is established with the supplier and an order is placed with the manufacturer for delivery at a later date.


On the Limited FHA 203(k), 50% of the contractors estimate is released at closing to offset startup costs.


30.               Is there anyone available who can prepare the work write up and cost estimates?


Yes.  HUD allows fee inspections to be independent consultant with the borrower. 



31.               What is the definition of a First-Time Homebuyer?


A single person or an individual and his or her spouse who have not owned a home (as a tenant in common or as a joint tenant by the entirety) during the three years immediately preceding the date of application for the 203(k) loan.  Any individual who is legally separated or divorced cannot be excluded from consideration, because the three-year waiting period does not apply, providing the individual no longer has an interest in the home.


32.               Is there a limitation on how many properties a person or organization can have in any area of the community?


Yes.  A borrower can have not more seven (7) units within a two block radius of the property they want to purchase.  However, if the property is in a local community area that bas been designated for redevelopment or revitalization, then this seven unit limitation does not apply.


35.          Is only one appraisal required to establish the “after-rehab” value of the property?       


Basically, yes on a purchase transaction, provided the lender can be assured that the contract sales price is reasonable or the existing debt on the property is low enough to assure a good equity position by the homeowner. 


A second appraisal is sometimes required on the refinance of an FHA 203(k) loan.             


36.               Can HUD-owned properties by purchased using the 203(k) loan?


Yes.  However, the property must be advertised that it is eligible for financing with a 203(k) loan. 


37.          Is the borrower required to enter into a contractual agreement with the general contractor who will do the work on the property?


                No.  However, it is strongly suggested that the lender protect their interests to assure no liens are placed on the property.