What is 203k financing?

203(k) financing is a federal program sponsored by the Housing and Urban Development authority which promotes the rehabilitation of homes. This program was created to help reinvigorate low income communities and encourage lending in these areas. 203(k) financing is aimed at borrowers looking to purchase “fixer uppers” and then improve them, repair them or modernize them. 203(k) financing lets you take out a single loan to both purchase the home and to finance home improvements, rather than forcing you to get a separate mortgage to acquire the home and high cost interim financing to cover the costs of improvement.

Which properties are eligible for 203(k) financing?

In order to be eligible for 203(k) financing, properties must be one to four family dwellings and must have been completed for at least one year. The property must also adhere to local zoning requirements in terms of how many units are on the site. Any additional units, buildings or permanent improvements must be attached to the dwelling that was financed (i.e. you cannot buy a lot of land with a dilapidated building and then build a new house in the same lot right next to it). You can, however, demolish or raze a structure, provided that some of the existing foundation remains in place. You can also use 203(k) financing to convert a single family dwelling into a multiple unit home, or vice versa.

203(K) financing can also be used for condominiums, provided that there are no investors in the project other than the owner/occupant and a qualified non-profit borrower, the rehabilitation is limited to the interior of the building, only 25 percent of the units are undergoing rehabilitation at a time and the maximum mortgage value does not exceed 100 percent of the after-improved value. The key here is that the improvements are being done on a not-for-profit basis, rather than as a commercial investment.

Types of Improvements

203(k) financing does not apply to “luxury items and improvements.” However, 203(k) financing can go to painting, room additions, decks and other non-essential improvements, provided that all health, safety and energy conservation improvements are addressed first. For more details on the standards for health, safety and energy efficiency improvements, read the HUD.gov page on 203(k) financing.

After improvements are completed, the house must be appraised and, in some cases, may need an appraisal before improvements are made.

To apply for 203(k) financing, you should locate the house you want first and then ask your mortgage lender to initiate the application process with the HUD. From there, your lender will be able to guide you through the requirements through the mortgage closing process.