When an investor or flipper wants to purchase a home that is in need of repairs or updating, they may obtain financing to purchase the home and additional funds to do the repairs and upgrades. When the repairs and upgrades are completed, a permanent mortgage is then taken to pay off the original loans.
FHA has a primary program for rehabilitation and upgrading single family homes called the Section 203k Program. A borrower can obtain a single long-term mortgage loan that finances both the acquisition and rehabilitation of the property with the 203k program.
The program is a success for lenders being able to help borrowers purchase these homes and have funds available for the repairs and upgrades. The mortgage amount is based on the projected value of the property after the work is completed while taking into account the cost of the work.
Local zoning requirements must be met. Any newly constructed units must be attached to existing dwellings. Provided some of the existing foundation system remains of the original building, homes that have been demolished or will be razed are also eligible. Converting a one-family dwelling into a two, three, or four-family dwelling, and vice versa is acceptable. A modular home from another site may be moved to the mortgaged property as well.
The loan may be originated on a "mixed use" residential property and condominium units provided that certain requirements are met. The proceeds from closing on the loan will be placed in an interest bearing escrow account that is insured by FDIC. The funds will be released by the lender upon completion of the proposed rehabilitation.
The Section 203k Program has been a great tool for community and neighborhood revitalization. This program has been a success as many lenders have used the program to help borrowers purchase and rehabilitate properties that may have otherwise been torn down.