Dear Dr. Don,
What is “203(k) financing?”
— Jeff Jingle

Dear Jeff,
A Section 203(k) financing is a special type of FHA mortgage loan that includes money in the loan proceeds for repairing or modernizing the property. At least $5,000 of the loan proceeds has to go toward fixing the place up.

Named for a section of the National Housing Act and later modified by subsequent legislation, the loan allows homebuyers to avoid using separate construction financing when rehabbing a property.

You can learn more about the loans on the Housing and Urban Development Web site. Its Web page, “FHA Programs for Business Partners,” explains the Section 203(k) loan program in greater depth.

The Web page lists the following requirements for the property:

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.

There are also limits on how much money can be borrowed. Again, from the Web page:

Maximum Mortgage Calculation.
The value is defined as the lesser of:

  1. The as-is value of the property before rehabilitation plus the cost of rehabilitation; or
  2. 110 percent of the expected market value of the property upon completion of the work.

If you decide this type of mortgage financing is right for you, an FHA-approved lender in your market can arrange the financing.