3. Can Section 203(k) be used to improve a condominium unit?

   Yes, however, condominium rehabilitation is subject to the following conditions:

   • Owner/occupant and qualified non-profit borrowers only; no investors;

   • Rehabilitation is limited only to the interior of the unit. Mortgage proceeds are not to be used for the rehabilitation of exteriors or other areas which are the responsibility of the condominium association, except for the installation of firewalls in the attic for the unit;

   • Only the lesser of five units per condominium association, or 25 percent of the total number of units, can be undergoing rehabilitation at any one time;

   • The maximum mortgage amount cannot exceed 100 percent of after-improved value.

   After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units. By law, Section 203(k) can only be used to rehabilitate units in one-to-four unit structures. However, this does not mean that the condominium project, as a whole, can only have four units or that all individual structures must be detached.

   Example: A project might consist of 6 buildings each containing 4 units, for a total of 24 units in the project and, thus, be eligible for Section 203(k). Likewise, a project could contain a row of more than four attached townhouses and be eligible for Section 203(k) because HUD considers each townhouse as one structure, provided each unit is separated by a 1 1/2 hour firewall (from foundation up to the roof).

   Similar to a project with a condominium unit with a mortgage insured under Section 234(c) of the National Housing Act, the condominium project must be approved by HUD prior to the closing of any individual mortgages on the condominium units.

4. Can Section 203(k) be used to convert a one family dwelling to a two, three, or four-family dwelling (or vice versa)?

   Yes.

5. Can Section 203(k) be used to move an existing house onto another site?

    Yes. However, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation.

   At closing, funds would be released to purchase the site and the rest of the mortgage proceeds would be placed in the Rehabilitation Escrow Account. The Borrower would have the site prepared to accept the dwelling. The first release would be based on the improvements made to the site, including the installation of the existing structure on the new foundation.

6. What is the minimum amount of rehabilitation required for a Section 203(k) mortgage?

   There is a minimum $5,000 requirement for the eligible improvements on the existing structure on the property. Minor or cosmetic repairs by themselves are unacceptable; however, they may be added to the minimum requirement.

7. What eligible improvements are acceptable under the $5,000 minimum requirement?

   Click here to visit Eligible Improvements.

8. Can a detached garage or another dwelling be placed on the mortgaged property?

   Yes. However, a new unit must be attached to the existing dwelling, and must comply with HUD's Minimum Property Standards in 24 CFR 200.926d and all local codes and ordinances.

9. Is there a time period on the rehabilitation construction period?

   Yes. The Rehabilitation Loan Agreement contains three provisions concerning the timeliness of the work. The work must begin within 30 days of execution of the Agreement. The work must not cease prior to completion for more than 30 consecutive days. The work is to be completed within the time period shown in the Agreement (not to exceed 6 months); the lender should not allow a time period longer than that required to complete the work.

10. What happens if the Borrower fails to perform under the terms of the Agreement?

    The lender may refuse to make further releases from the Rehabilitation Escrow Account. The funds remaining in the Account can be applied to reduce the mortgage principal. Also, the lender has the option to call the mortgage loan due and payable.

11. Does the rehabilitation construction have to comply with HUD's Minimum Property Standards?

    Yes. The improvements must comply with HUD's Minimum Property Standards

12. How long does it take to close a typical FHA203(k) loan?

    Although we can't answer for all lenders, American United has streamlined the process to 30 - 45 days.

13. Does HUD always require a contingency reserve to cover unexpected cost increases?

    Typically, yes. On properties older than 30 years and over $7,500 in rehabilitation costs, the cost estimate must include a contingency reserve. The reserve must be a minimum of ten (10) percent of the cost of rehabilitation; however, the contingency reserve may not exceed twenty (20) percent where major remodeling is contemplated. If utilities were not turned on for inspection, a minimum fifteen (15) percent is required.

14. How many draw releases can be scheduled during the rehabilitation period?

    As many as five releases (four plus a final) can be scheduled. The number of releases is normally dictated by the cash-flow requirements of the contractor. An inspection is always required with a scheduled release; however, inspections may be scheduled more often than releases if necessary to ensure compliance with the architectural exhibits, HUD's Minimum Property Standards and all local codes and ordinances. If the cost of rehabilitation exceeds $10,000, then additional draw inspections may be authorized under certain circumstances.

15. Can the architectural exhibits, including the cost estimate, be modified after the mortgage loan is closed?

    Yes. The changes must be approved by American United prior to beginning the work. If the change affects the health, safety or necessity of the dwelling, the contingency reserve can be used to pay for the change. However, if the health, safety or necessity of the dwelling is not affected and an increase in cost occurs, the Borrower must apply monies into the contingency reserve fund to pay for the change. Should the change result in a reduced cost of rehabilitation, the difference will be placed in the contingency reserve fund; if unused, it will be applied as a mortgage prepayment after completion of construction.

16. What happens if the cost of the rehabilitation increases during the rehabilitation period? Can the 203(k) mortgage amount be increased to cover the additional expenses?

    No. This emphasizes the importance of carefully selecting a contractor who will accurately estimate the cost of the improvements and satisfactorily complete the rehabilitation at or below the estimate.

17. How long will it take after the sales contract is signed to go to closing?

    If the cost estimates are completed within two weeks of signing the sales contract, the loan should close within 30 to 45 days, assuming there are no title problems and, of course, you qualify. Click here to be pre-approved.

18. Can a Section 203(k) mortgage be an Adjustable Rate Mortgage?

    Yes. An Adjustable Rate Mortgage is available to an owner-occupant only. Investors and non-profits are not eligible for an ARM.

19. Can a local government agency or a nonprofit organization use the 203(k) program?

    Yes. The same qualification requirements will be used as for an owner-occupant of the property.

20. Can mortgage payments (PITI) be included in the mortgage?

    Yes. Up to 6 months of payments may be included in the mortgage if the property is not occupied during the rehab period.

21. Can a six (or more) unit building be done using the 203(k) program?

    No. However, the building could be renovated and reduced to a four unit building.

22. Can a dwelling be converted to provide access for a disabled person?

    Yes. A dwelling can be remodeled to improve the kitchen and bath to accommodate a wheelchair access. Wider doors and handicap ramps can also be included in the cost of rehabilitation.

23. Is a contractor required to do the work?

    No. However, if the borrower wants to do any work or be the general contractor, they must be qualified to do the work, and do it in a timely and workmanlike manner. It is very important that the work be done in a time frame that will assure the completion of the work that will be agreed upon in the Rehabilitation Loan Agreement (signed at closing). A borrower doing their own work can only be paid for the cost of the materials. Monies saved can be allocated to cost overruns or additional improvements.

24. If the borrower does the work, how is the cost for work estimated?

    The cost estimate must be the same as if a contractor is doing the work, in case the borrower cannot (for some reason) complete the work.

25. Can cost savings on the rehabilitation be given back to the borrower?

    No. However, the savings can be transferred to cost overruns in other work items or can be used to make additional improvements to the property. If the cost savings are not used, the money must be applied to the mortgage principal, but the mortgage payments will remain the same, because the loan has already closed. To use the cost savings, it will be necessary for a Change Order to be completed and approved by the lender.

26. Can any rehabilitation money be paid upfront to offset the startup costs for the contractor?

    No. However, an exception can be allowed for kitchen and bath cabinetry, or floor covering, where a contract is established with the supplier and an order is placed with the manufacturer for delivery at a later date.

27. Is there anyone available who can prepare the work write-up and cost estimates?

    Yes. American United has a list of HUD approved Cost Estimators that will assist you with your work write-up.

28. Can the borrower do their own work write-up and cost estimate?

    Yes. However, it will take them between three to six months to complete. This slows down the process and will save only about $200, but waste a lot of valuable time. Hiring an independent consultant will help the closing occur within 30-45 days from completion of the work write-up.

29. Can nonresidential (storefront) property be eligible for a 203(k) insured loan?

    Yes. Mixed use residential property is acceptable provided the property has no greater than 25% (for a one story building); 33% (for a three story building); and 49% (for a two story building) of its floor area used for commercial (storefront) purposes. The rehab funds can only be used for the residential functions of the dwelling and areas used to access the residential part of the property.

30. Is only one appraisal required to establish the "after-rehab" value of the property?

    Basically, yes, provided the lender can be assured that the contract sales price is reasonable or the existing debt on the property is low enough to assure a good equity position by the homeowner. On a HUD-owned property, the lender can use HUD's appraisal for the after-rehab value.

31. Can HUD-owned properties be purchased using the 203(k) loan?

    Yes. However, the property must be advertised that it is eligible for financing with a 203(k) loan. If the HUD-owned property is purchased with other funds, a 203(k) loan can be made after the property is in the buyers name. In this case, cash back will be allowed to the borrower for a period of six months from purchasing the HUD-owned property.

32. Is the borrower required to enter into a contractual agreement with the general contractor who will do the work on the property?

    Yes. American United requires this to protect us and you to make sure the work is performed as agreed.

Contact an American United 203(k) specialist today at (800) 555-203(k) or e-mail us at info@americanunited.com.