The 203(k) loan helps homeowners make improvements to historic property
Many prospective home buyers are discouraged from buying property that needs repair or renovation work, which can involve substantial costs. The Federal Housing Administration established the Section 203(k) program to allow home buyers to finance the renovation, relocation or rehabilitation of a home. The FHA insures the loan, which includes the renovation cost and is issued through FHA-approved banks and mortgage companies.
Function
With a Section 203(k) loan, the home buyer can avoid the costly and time-consuming process of securing a renovation loan separate from the mortgage. A portion of the loan is held in an escrow account and released to the borrower on completion of the renovation for payment of the construction costs. Section 203(k) loans can be used to finance modernization of a home, safety improvements, renovation of mechanical systems such as plumbing or electrical systems, the replacement of floors, landscaping, energy conservation improvements or improvement to wheelchair and/or disabled access.
Requirements
The FHA sets guidelines for contractor agreements. The renovation cost for major improvements must be at least $5,000. Once that minimum is met, home buyers can finance additional minor and cosmetic improvements. Homes that need to be razed or demolished are also eligible as long as the foundation remains for reconstruction. The 203(k) may also be used to move a house to a new location.
Restrictions
Borrowers using Section 203(k) loans cannot use them to finance property for commercial use, or to build recreational facilities such as tennis courts, swimming pools, whirlpool baths and/or outdoor barbecues. The borrower arranges a review of the improvements and creates a work write-up with a certified HUD consultant, who creates an estimate for the escrow amount that will be dedicated to the improvements.
Process
The borrower and/or contractor must secure any necessary permits needed for repairs or renovations. On completion of the work, the contractor or borrower also must arrange for any needed inspections to determine if the work has met the city's building codes. Additional work or repairs needed according to this inspection can usually be financed by adjusting the escrow amount; the HUD estimate includes a contingency amount of up to 20 percent of the renovation cost to account for unexpected costs, overruns and delays.
Licensing
A licensed general contractor must perform all work financed by a Section 203(k) loan. The contractor must agree to work estimates created by the HUD consultant; the general contractor can also subcontract work to licensed repairmen, subcontractors or suppliers.
Tags: contractor must, home buyers, renovation cost, buyers finance, escrow amount, general contractor
