The FHA offers two programs with a 203 designation. One is known as the FHA 203(k) Rehabilitation Mortgage, the other is the 203(h) Rehabilitation Mortgage for disaster victims. HUD 4000.1 has the policies for both types of loans–but what are the differences between the two?
HUD 4000.1 describes the FHA 203(k) Rehab Loan as follows:
“The Section 203(k) Rehabilitation Mortgage Insurance is used to:
–rehabilitate an existing one- to four-unit Structure, which will be used primarily for residential purposes;
–rehabilitate such a Structure and refinance the outstanding indebtedness on the Structure and the Real Property on which the Structure is located; or
–purchase and rehabilitate the Structure and purchase the Real Property on which the Structure is located.”
A 203(k) Rehabilitation Mortgage comes in two options, which are described in HUD 4000.1 under the heading, “Types of 203(k) Rehabilitation Mortgages”. That section says borrowers can choose between a Standard 203(k) and a Limited 203(k). The Standard 203(k) Mortgage, “may be used for remodeling and repairs. There is a minimum repair cost of $5,000 and the use of a 203(k) Consultant is required”. That is an expense borrowers should anticipate when developing a budget for their mortgage loan (closing costs, fees and expenses, etc.)
The other option, the Limited 203(k), may only be used “for minor remodeling and non-structural repairs. The Limited 203(k) does not require the use of a 203(k) Consultant, but a Consultant may be used. The total rehabilitation cost must not exceed $35,000. There is no minimum rehabilitation cost”.
The 203(h) Rehab loan for disaster victims has a specific set of requirements:
“The previous residence (owned or rented) must have been located in a PDMDA (Presidentially Declared Major Disaster Area) and destroyed or damaged to such an extent that reconstruction or replacement is necessary. A list of the specified affected counties and cities and corresponding disaster declarations are provided by the Federal Emergency Management Agency (FEMA). The purchased or reconstructed Property must be a Single Family Property or a unit in an FHA-approved Condominium Project.”
A 203(h) loan can be used in conjunction with a 203(k) for approved applicants. And for 203(h) loans, HUD 4000.1 states, “The Borrower is not required to make the Minimum Required Investment (MRI). The maximum Loan-to-Value (LTV) ratio limit is 100 percent of the Adjusted Value. If a 203(k) is used in conjunction with a 203(h), the 203(k) LTV applies.”
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