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The FHA 203(k) program allows the homeowner to refinance the current mortgage, while also getting funds necessary to rehabilitate or upgrade the property. Most lenders will not allow financing for a home unless the condition and value of the property provide adequate loan security. When rehabilitation is required, that usually means that the lender will require the improvements be completed prior to a long term mortgage being made.
To be eligible, the property must be a 1-4 unit dwelling that has been completed for at least one year. Homes that have been demolished are eligible if some of the existing foundation remains in place. In addition to typical rehabilitation projects, the 203(k) loan program can be used to convert a one unit property to a two, three, or four family unit.
A 203(k) loan can also be used for a mixed-use property under certain criteria. The property must not have greater than 25% (for a one story building), 33% (for a three story building), and 49% (for a two story building) of its floor area used for commercial purposes. The commercial use of the property also must not affect the health and safety of the occupants, and the rehabilitation funds must only be used for repairs and upgrades to the residential functions of the property.
A condominium may also be rehabilitated utilizing a 203(k) loan. Only the interior of the condo unit may be rehabilitated. Also, only the lesser of 25% or 5 units may be undergoing rehabilitation at the time of the 203(k) loan.
Luxury items and improvements that are not a permanent part of the property are not allowable under the 203(k) loan program. However, the homeowner can use the program to finance such items as painting, room additions, decks, and even other items that do not need any other improvements. All health and safety items must be addressed prior to completing all general home improvements.