The Home Rehab loan(HUD 203(k) ) is is a loan, made from an approved lender, on a qualified property, to be sold, and rehabilitated after closing, with funds insured by HUD. Designed to stimulate positive growth and demonstrate the cooperation of lenders in lending to buyers looking in low income communities, this has the potential to be a great option in the right situation.
According to HUD’s website:
“Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before a long-term mortgage is made.”
“When a homebuyer 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 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. To minimize the risk to the mortgage lender, the mortgage loan (the maximum allowable amount) is eligible for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At this point the lender has a fully-insured mortgage loan.”
Which means that when your mortgage closes, the funds will be placed in an account that you can draw upon to complete the repairs. The repairs have to be completed in accordance with all federal, state, and local building codes and have the appropriate permits to be applicable.
First off, a buyer will need to determine if the property in question is eligible. If it is, it needs to be compliant with the acceptable use policy. From there, an assessment will need to be made to determine which improvements are eligible or approved.
Once that is completed….
The lender will need to have 2 appraisal reports. One for the As-Is amount and another representing the after-improved value. HUD will also need detailed architectural exhibits regarding the planned improvements. The report needs to include a detailed plan and cost description. Both of which can be provided by a licensed inspector or you can complete them yourself. (If hiring an inspector, HUD has established a fee guideline based upon the estimated cost of repair.)
At closing, the repair funds are placed into an “Rehabilitation Escrow Account”. Once there, funds will can be drawn to complete the necessary repairs. An inspector will verify the repairs have been completed according to building code with the necessary permits before the funds are released completely.
This has the potential to be a great option for people looking for homes that may need some work. For instance, if a potential property does not qualify for FHA due to needed repair, a 203(k) may be a viable option if the home qualifies. However, as with any sale, be prepared to jump through a few hoops to get to the closing table. Lastly, after speaking with a lender, I would expect slightly higher interest rates than you would experience with a conventional or FHA loan on a 203(k) Rehab a Home loan.
If you have any questions regarding a 203(k) Rehab Loan for homes for sale in Birmingham, drop us a line. We would be glad to answer your question to the best of our abilities!