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:

A.    Owner/occupant and qualified borrowers only;

B.     Rehabilitation is limited only to the interior of the unit. Mortgage proceeds are not to be used for the rehabilitation of exteriors or other areas which are the responsibility of the condominium association, except for the installation of firewalls in the attic for the unit;

C.    Only the lesser of five units per condominium association, or 25 percent of the total number of units, can be undergoing rehabilitation at any one time;

D.    The maximum mortgage amount cannot exceed 100 percent of after-improved value. After rehabilitation is complete, the individual building within the condominium must not contain more than four units. By law, Section 203(k) can only be used to rehabilitate units in one-to-four unit structures. However, this does not mean that the condominium project, as a whole, can only have four units or that all individual structures must be detached. Example: A project might consist of six buildings each containing four units, for a total of 24 units in the project and, thus, be eligible for Section 203(k).

Likewise, a project could contain a row of more than four attached townhouses and be eligible for Section 203(k) because HUD considers each townhouse as one structure, provided each unit is separated by a 1 ½ hour firewall (from foundation up to the roof). Similar to a project with a condominium unit with a mortgage insured under Section 234© of the National Housing Act, the condominium project must be approved by HUD prior to closing of any individual mortgages on the condominium units.


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 Section 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.                  What eligible improvements are acceptable under the $5000 minimum requirements?


A.    Structural alterations and reconstruction (e.g., repair or replacement of structural damage, chimney repair, additions to the structure, installation of an additional bath(s), skylights, finished attics and/or basements, repair of termite damage and the treatment against termites or other insect infestation, etc.).

B.     Changes for improved functions and modernization (e.g., remodeled bathrooms and kitchens, including permanently installed appliances, i.e., build-in range and/or oven, range hood, microwave, dishwasher).

C.    Elimination of health and safety hazards (including the resolution of defective paint surfaces or lead-based paint problems on homes built prior to 1978).

D.    Changes for aesthetic appeal and elimination of obsolescence (e.g., new exterior siding, adding second story to the home, covered porch, stair railings, attached carport).

E.     Reconditioning or replacement of plumbing (including connecting to public water and/or sewer system), heating, air conditioning and electrical systems. Installation of new plumbing fixtures is acceptable, including interior whirlpool bathtubs.

F.     Installation of well and/or septic system. The well or septic system must be installed or repaired prior to beginning any other repairs to the property. A property less than ½ acre with a separate well or septic system is not acceptable; also, a property less than 1 acre with both a well and a septic system is unacceptable. Lots smaller than these sizes usually have problems in the future; however, the local HUD Field office can approve smaller lot size requirements where the local health authority can justify smaller lots. The installation of a new well or the repair of an existing well (used for the primary water source to the property) can be allowed provided there is adequate documentation to shoe there is reason to believe the well will produce a sufficient amount of potable water for the occupants. (A well log of surrounding properties from the local health authority is acceptable documentation.) Refer to HUD Handbook 4910.1, Appendix K, for additional information.

G.    Roofing, gutters and downspouts.

H.    Flooring, tiling and carpeting.

I.       Energy conservation improvements (e.g., new double pane windows, steel insulated exterior doors, insulation, solar domestic hot water systems, caulking and weather stripping, etc.).

J.       Major landscape work and site improvement (e.g., patios, decks and terraces that improve the value of the property equal to the dollar amount spent on the improvements or required to preserve the property fro erosion). The correction of grading the drainage problems is also acceptable. Tree removal is acceptable if the tree is a safety hazard to the property. Repair of existing walks and driveway is acceptable if it may affect the safety of the property. (Fencing, new walks and driveways, and general landscape work (i.e., trees, shrubs, seeding or sodding) cannot be in the first $5000 requirements.)

K.    Improvements for accessibility to a disabled person (e.g., remodeling kitchens and baths for wheelchair access, lowering kitchen cabinets, installing wider doors and exterior ramps, etc.). related fixtures such as new cooking ranges, refrigerators, and other appurtenances, as well as general painting are also eligible; however, it must be in addition to the $5000 requirement.


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




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.              Can Section 203(k) be processed under the Direct Endorsement Program?


Yes. Direct Endorsement Lenders are required to attend special training prior to processing 203(k) loans and they must submit test cases as determined by the local office.


13.              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.


14.              How many draw releases can be scheduled during rehabilitation period?


As many as five releases (four plus a final) can be scheduled. The number of releases is normally dictated by the cash flow requirements of the contractor. An inspection is always required with a schedule release; however, inspections may be scheduled more often than releases if necessary to ensure compliance with the architectural exhibits, HUD’s Minimum Property Standards and all local codes and ordinances. If the cost of rehabilitation exceeds $10,000, then additional draw inspections may be authorized under certain circumstances.


15.              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.


16.              Can the rehabilitation escrow increase 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.


17.              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.





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


Yes. Up to six months of payments may be included in the mortgage if the property is not occupied during the rehabilitation period. The consultant must state that the repairs will take how ever many months of mortgage payments are being escorwed.



19. Are investment homes (homes being rented or not occupied by the owner currently or in the near future) or second homes allowed in the FHA 203(k)?


No, HUD has allowed investors to use this program in the past, however since 1996 investment and second homes have been excluded from using the FHA 203(k).


However, the program does allow for non-owner occupied co-borrowers. This means that if the owner-occupant can not qualify for the loan by themselves, an eligible family member will be allowed to co-sign for the loan and will not br required to live in the home.


20. 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 wheelchair access. Wider doors and handicap ramps can also be included in the cost of rehabilitation.


21. Is a contractor required to do the work?


No. However, if the borrower wants to do any work, they must be 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.




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


Enough money will be escrowed to pay a contractor. This insures the lender that if the homeowner get hurt while working on the project, the will not cease. Unused money will be subtracted from the loan balance when the final inspection is completed.


23. 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 by the consultant and approved by the lender.



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


Only FHA 203(k) approved consultants can do the work write up. Contact your lender for the list of approved 203(k) inspectors.


25.              Is there such a thing as a “Stated Income” or NIV loan for the FHA 203(k)?


No. The loan is strictly full documentation, this means that all income, assets, and credit will be verified with income tax documents, bank statements etc….




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

Basically, yes, 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. On a HUD-owned property, the lender can use HUD’s appraisal for the after-rehab value.


27.              Can HUD-owned properties be purchased using the 203(k) loan?

Yes. However, the property must be advertised that it is eligible for financing with a 203(k) loan. If the HUD-owned property is purchased with other funds, a 203 (k) loan can be made after the property is in the buyers name. In this case, cash back will be allowed to the borrower for a period of six months from purchasing the HUD-owned property.


28. 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. The lender will require the contractor to execute a “Homeowner/Contractor Agreement” with the homeowner. This form spells out the FHA 203(k) process to minimize misunderstanding on the draw process.