How to Get a Bank to Finance an Unfinished Remodel

For anyone who has ever wanted to have a dream home, a loan is now available that can make that dream a reality. The FHA 203(k) loan allows a customer to purchase or refinance a property and finance the cost of rehabilitating the property with one loan and one closing. HUD strongly encourages the 203(k) program; the loan is now easier to close than ever before.

The advantages of the 203(k) loan is based on the projected value of the property after rehab work is completed and takes into account the cost of the work. The funds for the work to be completed are placed in escrow with the Lender allowing construction draws to follow. The 203(k) program is available only to an owner-occupant. Standard FHA down payment requirements apply for owner-occupants. With the 203(k) program, up-front mortgage insurance premium is now required (effective December 31, 2005) and up to six months mortgage payments can be financed if the house is not habitable during the renovation. The 203(k) program may be assumable for qualifying customers.

Another advantage of the 203(k) is the wide range of properties that can be purchased using the loan. Permissible properties include, but are not limited to, the following:

* One to four unit properties that satisfy local zoning requirements and were completed at least one year prior;

* Homes demolished or razed as part of the rehabilitation process if the existing foundation system remains intact;

* Any property the buyer wishes to convert from a single family dwelling into a two to four family dwelling or vice versa;

* A “mixed use” residential and commercial property provided it meets certain requirements.

* Cooperatives are not eligible.


Several simple guidelines apply to the 203(k) loan. First, mortgage proceeds must be used in part for rehabilitation and/or improvements to a property. There is no minimum cost of repairs and/or improvements to be done.

Any repair that may affect the health and safety of the property and/or improvements in functionality and modernization to the property are acceptable repairs.


The following list illustrates the vast array of improvements that can be financed through the 203(k) program;

* Structural alterations and reconstruction;

* Changes to improve functionality and modernization;

* Elimination of health and safety hazards; changes for aesthetic appeal and elimination of obsolescence;

* Reconditioning or replacement of plumbing, heating, air conditioning and electrical systems; Installation of a well or septic system;

* Roofing, gutters and down spouts;

* Flooring, tiling and carpeting;

* Energy conservation improvements;

* Major landscape work;

* Improvements for handicapped accessibility.


Luxury items and improvements that do not become a permanent part of the real property, are not eligible for financing through the 203(k) program as a rehab cost. Installation of a barbecue pit, bathhouse, dumbwaiter, exterior hot tub, sauna, spa, outdoor fireplace, photo mural, new swimming pool, gazebo, television antenna, satellite dish, or tennis court for example would not be acceptable under the 203(k) program.

Higher loan amounts are allowed on 2-4 unit buildings. Moreover, the 203(k) allows brokers, agents and other parties participating in the sale of the property to be paid before the renovations are completed. The 203(k) loan is a terrific financial product for those attempting to either sell or purchase a “handyman’s special” or a foreclosure property. The 203(k) allows purchasers to renovate and create their dream home with a small down payment and a minimum of hassle.


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