The FHA 203(k) loan: Renovating America's Housing Stock

The nation’s existing housing stock is aging, and the need for rehabilitating these homes has intensified over time, particularly given the number of homes that went into foreclosure and were either vandalized, unkempt or otherwise left vacant during the nation’s housing crisis beginning in 2006.

Traditional lending standards dictate that a would-be homebuyer would first have to qualify for a purchase money loan to buy the property, followed by a construction loan to handle the rehabilitation, and lastly a permanent mortgage to cover the total cost, including construction, when the work was completed.

However, the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development, has a solution which eliminates the need for separate loans, thereby promoting the American Dream of homeownership for more people along with the revitalization of communities around the country.

Although it has been around for decades, the FHA 203(k) renovation loan program is gaining popularity as homebuyers begin to realize the powerful impact it can yield considering the condition of many real estate markets nationwide. Not only does it provide hope and opportunity for homebuyers to purchase a home at a discounted price, it allows those who could not otherwise afford to purchase a home and fix it up to do so with a low down payment and looser qualifying standards than a conventional loan.

The 203(k) mortgage insurance program can be used for more than just the purchase of a single family home that requires improvements, which makes it ideal for the purchase of a foreclosure or short sale. Buyers are not limited to one-to-four unit properties. The 203(k) program also permits buyers to purchase a condominium unit in an FHA approved project. The program is also available for homeowners who want to refinance and fix up their current residence.

While not a lender, the FHA’s role is one of insuring single family mortgages made by lenders specifically approved for the 203(k) program, utilizing the services of contractors who also have to meet strict standards set by the FHA in order to participate in the program.