The FHA 203(k) Rehabilitation Loan, also known as the FHA Rehab Loan, is a government-backed mortgage program offered by the Federal Housing Administration (FHA) to help finance both the purchase and rehabilitation of a single-family home. This program is particularly beneficial for borrowers who want to renovate a fixer-upper or improve an older property.
Eligibility:
- FHA Loan Eligibility: Must meet general FHA loan requirements, including minimum credit score (typically 620 or even 580 with a higher down payment) and debt-to-income ratio (ideally below 45%).
- Property Eligibility: The property must be a single-family dwelling and meet FHA property standards.
- Two Loan Options:
- Limited 203(k): Allows financing for repairs up to $35,000 for non-structural improvements (painting, appliances, etc.).
- Standard 203(k): For more extensive renovations, financing can cover both the purchase price and major rehabilitation costs, with a minimum renovation expense of $5,000.
Benefits:
- Escrow Account: Funds for renovations are held in a disbursement escrow account and released to approved contractors as work progresses.
- Combined Financing: Finances both home purchase and renovation costs into a single mortgage.
- Flexible Repair Options: Caters to a range of renovation needs, from minor upgrades to major rehabilitation projects.
Considerations:
- Government-Backed Security: FHA backing can offer more favorable loan terms for borrowers.
- Additional Loan Requirements: The 203(k) program has additional paperwork and inspections compared to a standard FHA loan.
- Contractor Approval: Contractors must be FHA-approved for 203(k) loan projects.