Rehab a Home
The Federal Housing Administration (FHA), which is part of
the Department of Housing and Urban Development (HUD),
administers various single family mortgage insurance
programs. These programs operate through FHA-approved
lending institutions which submit applications to have the
property appraised and have the buyer's credit approved.
These lenders fund the mortgage loans which the Department
insures. HUD does not make direct loans to help people buy
homes. The Section 203(k) program is the Department's
primary program for the rehabilitation and repair of single
family properties. As such, it is an important tool for
community and neighborhood revitalization and for expanding
homeownership opportunities. Since these are the primary
goals of HUD, the Department believes that Section 203(k) is
an important program and intend to continue to strongly
support the program and the lenders that participate in it.
Many lenders have successfully used the
Section 203(k) program in partnership with state and local
housing agencies and nonprofit organizations to rehabilitate
properties. These lenders, along with state and local
government agencies, have found ways to combine Section
203(k) with other financial resources, such as HUD's HOME,
HOPE, and Community Development Block Grant Programs, to
assist borrowers. Several state housing finance agencies
have designed programs, specifically for use with Section
203(k) and some lenders have also used the expertise of
local housing agencies and nonprofit organizations to help
manage the rehabilitation processing. The Department also
believes that the Section 203(k) program is an excellent
means for lenders to demonstrate their commitment to lending
in lower income communities and to help meet their
responsibilities under the Community Reinvestment Act (CRA).
HUD is committed to increasing homeownership opportunities
for families in these communities and Section 203(k) is an
excellent product for use with CRA-type lending programs. If
you have questions about the 203(k) program or are
interested in getting a 203(k) insured mortgage loan, we
suggest that you get in touch with an FHA-approved lender in
your area or the Homeownership Center in your area.
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
To be eligible, the property must be a one-
to four-family dwelling that has been completed for at least
one year. The number of units on the site must be acceptable
according to the provisions of local zoning requirements.
All newly constructed units must be attached to the existing
dwelling. Cooperative units are not eligible. Homes that
have been demolished, or will be razed as part of the
rehabilitation work, are eligible provided some of the
existing foundation system remains in place. In addition to
typical home rehabilitation projects, this program can be
used to convert a one-family dwelling to a two-, three-, or
four-family dwelling. An existing multi-unit dwelling could
be decreased to a one- to four-family unit. An existing
house (or modular unit) on another site can be moved onto
the mortgaged property. 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 placed and
secured to the new foundation. A 203(k) mortgage may be
originated on a "mixed use" residential property provided
the property has no greater than 25 percent (for a one story
building); 33 percent (for a three story building); and 49
percent (for a two story building) of its floor area used
for commercial (storefront) purposes. The commercial use
will not affect the health and safety of the occupants of
the residential property and the rehabilitation funds will
only be used for the residential functions of the dwelling
and areas used to access the residential part of the
The Department also permits Section 203(k) mortgages to be
used for individual units in condominium projects that have
been approved by FHA, the Department of Veterans Affairs, or
are acceptable to FNMA under the guidelines listed below.
The 203(k) program was not intended to be a project mortgage
insurance program, as large scale development has
considerably more risk than individual single-family
mortgage insurance. Therefore, condominium rehabilitation is
subject to the following conditions:
Owner/occupant and qualified non-profit borrowers only-
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 firewall's in the attic for the
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
The maximum mortgage amount cannot exceed 100 percent of
After rehabilitation is complete, the individual
buildings 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 1/2 hour firewall
(from foundation up to the roof). Similar to a project with
a condominium unit with a mortgage insured under Section
234(c) of the National Housing Act, the condominium project
must be approved by HUD prior to the closing of any
individual mortgages on the condominium units.
How the Program Can Be Used
This program can be used to accomplish rehabilitation and/or
improvement of an existing one-to-four unit dwelling in one
of three ways:
1. To purchase a dwelling and the land on which the
dwelling is located and rehabilitate it.
2. To purchase a dwelling on another site, move it onto
a new foundation on the mortgaged property and
3. To refinance existing indebtedness and rehabilitate
such a dwelling.
To purchase a dwelling and the land on which
the dwelling is located and rehabilitate it, and to
refinance existing indebtedness and rehabilitate such a
dwelling, the mortgage must be a first lien on the property
and the loan proceeds (other than rehabilitation funds) must
be available before the rehabilitation begins. To purchase a
dwelling on another site, move it onto a new foundation and
rehabilitate it, the mortgage must be a first lien on the
property; however, loan proceeds for the moving of the house
cannot be made available until the unit is attached to the
Mortgage proceeds must be used in part for rehabilitation
and/or improvements to a property. There is a minimum $5000
requirement for the eligible improvements on the existing
structure(s) on the property. Rehabilitation or improvements
to a detached garage, a new detached garage, or the addition
of an attached unit(s) (if allowed by the local zoning
ordinances) can also be included in this first $5000.
Properties with separate detached units are acceptable,
however, a newly constructed unit must be attached to an
existing unit to be eligible under 203(k). Any repair is
acceptable in the first $5000 requirement that may affect
the health and safety of the occupants. Minor-or cosmetic
repairs by themselves cannot be included in the first $5000,
but may be added after the $5000 threshold is reached.
Examples of eligible improvements are listed below. (This
list is not all inclusive.)
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.).
Changes for improved functions and modernization (e.g.,
remodeled bathrooms and kitchens, including permanently
installed appliances, i.e., built-in range and/or oven,
range hood, microwave, dishwasher).
Elimination of health and safety hazards (including the
resolution of defective paint surfaces or lead-based
paint problems on homes built prior to 1978).
Changes for aesthetic appeal and elimination of
obsolescence (e.g., new exterior siding, adding a second
story to the home, covered porch, stair railings,
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.
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.
Roofing, gutters and downspouts.
Flooring, tiling and carpeting.
Energy conservation improvements (e.g., new double pane
windows, steel insulated exterior doors, insulation,
solar domestic hot water systems, caulking and weather
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 from
The correction of grading and drainage problems.
Tree removal is acceptable if the tree is a safety
hazard to the property.
Repair of existing walks and driveway if it may affect
the safety of the property.
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.).
When basic improvements are involved, the
following costs can be included in addition to the minimum
New free standing range, refrigerator, washer and dryer,
trash compactor and other appurtenances (used appliances
are not eligible).
Interior and exterior painting.
The repair of a swimming pool, not to exceed $1,500.
Luxury items and improvements that do not
become a permanent part of the real property are not
eligible as a cost of rehabilitation. The items listed below
(not limited to this list) are not acceptable under the
203(k) program, including the repair of any of the
following: Barbecue pit; bathhouse; dumbwaiter; exterior hot
tub; sauna, spa and whirlpool bath; outdoor fireplace or
hearth; photo mural; installation of a new swimming pool;
gazebo; television antenna; satellite dish; tennis court;
tree surgery. Additions or alterations to provide for
commercial use are not eligible.
All rehabilitation construction and/or
additions financed with Section 203(k) mortgage proceeds
must comply with the following:
A. Cost Effective Energy Conservation Standards
Addition to Existing Structure. New construction must
conform with local codes and HUD Minimum Property Standards.
Rehabilitation of Existing Structure. To improve the thermal
efficiency of the dwelling, the following are required:
Weather strip all doors and windows to reduce
infiltration of air when existing weather stripping is
inadequate or nonexistent.
Caulk or seal all openings, cracks or joints in the
building envelope to reduce air infiltration.
Insulate all openings in exterior walls where the cavity
has been exposed as a result of the rehabilitation.
Insulate ceiling areas where necessary
Adequately ventilate attic and crawl space areas. For
additional information and requirements, refer to 24 CFR
Replacement of Systems.
Heating, ventilating, and air conditioning system supply
and return pipes and ducts must be insulated whenever
they run through unconditioned spaces.
Heating systems, burners, and air conditioning systems
must be carefully sized to be no greater than 15 percent
oversized for the critical design, heating or cooling,
except to satisfy the manufacturer's next closest
B. Smoke Detectors. Each sleeping area
must be provided with a minimum of one
approved, listed and labeled smoke detector installed
adjacent to the sleeping area.
In order to determine the maximum mortgage
amount, the 203(k) valuation analysis consists of two
separate determinations of value.
A. As-is Value.
A separate appraisal (Uniform Residential Appraisal Report)
may be required to determine the as-is value. However, the
lender may determine that an as-is appraisal is not feasible
or necessary. In this instance, the lender may use the
contract sales price on a purchase transaction, or the
existing debt on a refinance transaction, as the as-is
value, when this does not exceed a reasonable estimate of
Further, on a refinance transaction, when a large amount of
existing debt (i.e., first and second mortgages) suggests
that the borrower has little or no equity in the property,
the lender must obtain a current as-is appraisal on which to
base the estimated as-is value. On a refinance, the borrower
may have substantial equity in the property to assure that
no further down payment is required on the new loan amount.
In some cases, the borrower will not have an existing
mortgage on the property. In this case, the lender should
obtain some comparable's from a real estate agent/ broker to
estimate an approximate as-is value of the property. Another
way of establishing the as-is value is to obtain a copy of
the local jurisdiction tax valuation on the property.
B. Value After Rehabilitation.
The expected market value of the property is
determined upon completion of the proposed rehabilitation
For a HUD-owned property an as-is appraisal
is not required and a DE lender may request the HUD Field
Office to release the outstanding HUD Property Disposition
appraisal on the property to the lender to establish the
maximum mortgage for the property. The HUD appraisal will be
considered acceptable for use by the lender if it is not
over one year old prior to bid acceptance from HUD and the
sales contract price plus the cost of rehabilitation does
not exceed 110 percent of the "As Repaired Value" shown on
the HUD appraisal. If the HUD appraisal is insufficient, the
DE Lender may order another appraisal to assure the market
value of the property will be adequate to make the purchase
of the property feasible. For a HUD-property, down payment
for an owner-occupant or non-profit organization is three
percent of the accepted bid price of the property and 100
percent financing on all other costs.
Recently Acquired Properties
Homebuyers who purchase a property with cash
can refinance the property using 203(k) within six (6)
months of purchase, the same as if the buyer purchased the
property with a 203(k) insured loan to begin with. Evidence
of interim financing is not required. The mortgage
calculations will be done the same as a purchase
transaction. Cash back will be allowed to the borrower in
this situation less any down payment and closing cost
requirement for the 203(k) loan. A copy of the Sales
Contract and the HUD-1 Settlement Statement must be
submitted to verify the accepted bid price (as-is value) of
the property and the closing date.
The improvements must comply with HUD's Minimum Property
Standards and all local codes and ordinances. The homebuyer
may decide to employ an architect or a consultant to prepare
the proposal. The homebuyer must provide the lender with the
appropriate architectural exhibits that clearly show the
scope of work to be accomplished. The following list of
exhibits are recommended, but may be modified by the local
HUD Field Office as required.
A Plot Plan of the Site is required only if a new
addition is being made to the existing structure. Show
the location of the structure(s), walks, drives,
streets, and other relevant details. Include finished
grade elevations at the property corners and building
corners. Show the required flood elevation.
Proposed Interior Plan of the Dwelling. Show where
structural or planning changes are contemplated,
including an addition to the dwelling.
Work Write-up and Cost Estimate. Any format may be used
for these documents, however, quantity and the cost of
each item must be shown. Also include a complete
description of the work for each item.
Cost estimates must include labor and
materials sufficient to complete the work by a contractor.
Homebuyers doing their own work cannot eliminate the cost
estimate for labor, because if they cannot complete the work
there must be sufficient money in the escrow account to get
a subcontractor to do the work. The Work Write-up does not
need to reflect the color or specific model numbers of
appliances, bathroom fixtures, carpeting, etc., unless they
are nonstandard units. The consultant who prepares the work
write-up and cost estimate (or an architect, engineering or
home inspection service) needs to inspect the property to
there are no rodents, dryrot, termites and other infestation
there are no defects that will affect the health and safety
of the occupants
the adequacy of the existing structural, heating, plumbing,
electrical and roofing systems
the upgrading of thermal protection (where necessary).
Definitions for Use in the 203(k) Program
A. Insurance of Advances.
This refers to insurance of the 203(k) mortgage prior to the
rehabilitation period. A mortgage that is a first lien on
the property is eligible to be endorsed for insurance
following mortgage loan closing, disbursement of the
mortgage proceeds, and establishment of the Rehabilitation
Escrow Account. The mortgage amount may include funds for
the purchase of the property or the refinance of existing
indebtedness, the costs incidental to closing the
transaction, and the completion of the proposed
The mortgage proceeds allocated for the
rehabilitation will be escrowed at closing in a
Rehabilitation Escrow Account.
B. Rehabilitation Escrow Account.
When the loan is closed, the proceeds
designated for the rehabilitation or improvement, including
the contingency reserve, are to be placed in an interest
bearing escrow account insured by the Federal Deposit
Insurance Corporation (FDIC) or the National Credit Union
Administration (NCUA). This account is not an escrow for the
paying of real estate taxes, insurance premiums, delinquent
notes, ground rents or assessments, and is not to be treated
as such. The net income earned by the Rehabilitation Escrow
Account must be paid to the mortgagor. The method of such
payment is subject to agreement between mortgagor and
mortgagee. The lender (or its agent) will release escrowed
funds upon completion of the proposed rehabilitation in
accordance with the Work Write-Up and the Draw Request (Form
Performed by HUD-approved fee inspectors or
on the HUD-accepted staff of the DE lender. The fee
inspector is to use the architectural exhibits in order to
make a determination of compliance or non-compliance. When
the inspection is scheduled with a payment, the inspector is
to indicate whether or not the work has been completed.
Also, the inspector is to use the Draw Request form (Form
HUD-9746-A). The first draw must not be scheduled until the
lender has determined that the applicable building permits
have been issued.
A ten percent holdback is required on each release from the
Rehabilitation Escrow Account. The total of all holdbacks
may be released only after a final inspection of the
rehabilitation and issuance of the Final Release Notice. The
lender (or its agent) may retain the holdback for a maximum
of 35 calendar days, or the time period required by law to
file a lien, whichever is longer, to ensure that no liens
are placed on the property.
E. Contingency Reserve.
At the discretion of the HUD Field Office,
the cost estimate may include a contingency reserve if the
existing construction is less than 30 years old, or the
nature of the work is complex or extensive. For properties
older than 30 years, the cost estimate must include a
contingency reserve of a minimum of ten percent of the cost
of rehabilitation. The contingency reserve may not exceed
twenty percent where major remodeling is contemplated. If
the utilities were not turned on for inspection, a minimum
fifteen percent is required. If the scope of work is well
defined and uncomplicated, and the rehabilitation cost is
less then $7500, the lender may waive the requirement for a
contingency reserve. The contingency reserve account can be
used by the borrower to make additional improvements to the
dwelling. A Request for Change Letter must be submitted with
the applicable cost estimates. The change can only be
accepted when the lender determines it is unlikely that any
deficiency that may affect the health and safety of the
property will be discovered and the mortgage will not exceed
the appraised value of the property less the statutory
investment requirement. If the mortgage exceeds the
appraised value less the statutory investment, then the
contingency reserve must be paid down on the mortgage
principal. If a borrower feels that the contingency reserve
will not be used and he wishes to avoid having the reserve
applied to reduce the mortgage balance after issuance of the
Final Release Notice, the borrower may place his own funds
into the contingency reserve account. In this case, if money
is remaining in the account after the Final Release Notice
is issued it may be released back to the borrower. If the
mortgage is at the maximum mortgage limit for the area or
for the particular type of transaction, but a contingency
reserve is necessary, the contingency reserve must be placed
into an escrow account from other funds of the borrower at
closing. Under these circumstances, if the contingency
reserve is not used, the remaining funds in the escrow
account will be released to the borrower after the Final
Release Notice has been issued.
F. Mortgage Payment Reserve.
Funds not to exceed the amount of six mortgage payments
(including the mortgage insurance premium) can be included
in the cost of rehabilitation to assist a mortgagor (whether
a principal residence or an investment property) when the
property is not occupied during rehabilitation. The number
of mortgage payments cannot exceed the completion time frame
required in the Rehabilitation Loan Agreement. The lender
must make the monthly mortgage payments directly from the
interest bearing reserve account. Money remaining in the
reserve account after the Final Release Notice must be
applied to the mortgage principal.
G. Approval of Non-Profit Agencies.
A non-profit agency, before it can be
approved as an eligible mortgagor and obtain the same
mortgage amount as available to owner-occupants on Section
203(k) mortgages, must demonstrate its experience as a
housing provider to HUD and meet all other requirements
described in HUD Handbook. It must also be able to provide
satisfactory evidence that it has the financial capacity to
purchase the properties.