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 mortgage loan.
What eligible improvements are acceptable?
- 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, attached carport).
- 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. A property less
than 1/2 acre with a separate well
or
septic system is not acceptable;
also, a property less than 1
acre with both a well and a septic
system
is unacceptable. Lots smaller
than these sizes, usually have
problems
in the future; however, the local
HUD Field Office can approve
smaller lot size requirements where
the local
health authority can justify
smaller lots. The installation
of a new well
or the repair of an existing
well (used for the primary water
source
to the property) can be allowed
provided there is adequate documentation
to
show there is reason to believe
the well will produce a sufficient
amount
of potable water for the occupants.
(A well log of surrounding properties
from the local health authority
is acceptable documentation.) Refer
to HUD Handbook 4910.1, Appendix
K, for additional information.
- 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 stripping,
etc.).
- 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 erosion). The correction
of grading and drainage problems
is
also acceptable. Tree removal
is acceptable if the tree is a
safety
hazard to the property. Repair
of existing walks and driveway
is acceptable
if it may affect the safety of
the property. (Fencing, new walks
and
driveways, and general landscape
work (i.e., trees, shrubs, seeding
or sodding) cannot be in the
first $5000 requirement.)
- 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.). Related fixtures
such as new cooking ranges, refrigerators,
and other appurtenances, as well
as general painting are also
eligible;
however, it must be in addition
to the $5,000 requirement.
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