When a home buyer wants to purchase a San Jose fixer upper, they usually has to obtain permanent financing first to purchase the dwelling and then use the equity to get additional funds needed to rehab the home!    But the acquisition and construction loans involves relatively high interest rates since the rehab loans have short amortization periods.

The Section 203(k) of the HUD was designed to address this exact situation where the home owner 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 After Rapair Value of the home taking into the account the cost of the work.   With HUD in the picture, the risk to the mortgage lender is actually minimized since the maximum allowable amount is eligible for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is opened.   

The rehab loan amounts are capped at $35,000 but that amount is sufficient to do a nice Small Kitchen or Small Bath Remodel.

Eligible Property

To be eligible, the property must be a 1-4 unit homes that have been completed for one year!  The proposed remodeling and rehab has to be code compliant with the local zoning requirements.  Also, all newly developed units must be attached to the existing home.   Cooperative or detached units are not eligible.   However, homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided the existing foundation system remains in place.

A 203(k) mortgage could to obtained on a “mixed use” residential property provided:

1) 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.

2) the commercial use will not affect the health and safety of the occupants of the residential property.

3) the rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.

For more information about FHA 203k Loans please contact our Mortgage partners.

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